Macroprudential policy confusion
Yesterday the Chancellor wrote to the Governor of the Bank of England confirming the remit of the Financial Policy Committee (the BOE’s ‘macroprudential policy setting committee’.
Whilst this may sound like a fairly tedious and mundane matter, it was in reality anything but. As Dan Davies put it on twitter, the tone was about as close to “did you spill my pint” as Bank/Treasury communications ever comes.
Reading between the lines the Treasury seems concerned about the consistency of the FPC’s message (the Treasury is keen for the FOC to have “clear, focussed and consistent messages”) and frustrated by the FPC’s interaction with EU regulations (the FPC should “consider how best o meet these legislative requirements and cooperate effectively with the relevant EU institutions and agencies”).
But the big message from the letter is on growth. The Chancellor writes that:
It is particularly important, at this stage of the cycle, that the Committee takes into account, and gives due weight to, the impacts of its actions on the near-term economic recovery.
Or, in plainer English – “It’s obviously important to ensure financial stability but right now boosting growth is more important than safer banks”.
The letter highlights the Treasury’s concern that the Bank may set such tough capital and liquidity requirements for banks and other financial institutions that the flow of credit to business and households is impaired.
This little battle was been brewing for a while, as I wrote after the Bank’s latest Financial Stability Report was published:
The current lending numbers are absolutely awful. Just this week the BBA revealed that the big high street banks still have falling lending to non-financial firms and very weak mortgage lending growth.
But we now know that a key aim of Treasury policy, the flagship policy in last week’s budget, is to boost mortgage lending.
BIS is desperately trying to find ways to expand lending to small business (and Vince Cable today has already said that “The idea that banks should be forced to raise new capital during a period of recession is erroneous”), whilst the Treasury is keen on boosting the growth of housing finance. The OBR’s Robert Chote yesterday argued that “banks are a major constraint on the economy”.
In other words macroeconomic policymakers in the Government – whether from HMT or BIS – all want to see lending increased.
Meanwhile the FPC is saying that banks are not in a position to boost lending without more capital. The FPC is saying this at the very same time that the BOE is jointly running the FLS scheme to try and boost bank lending.
This is a messy situation. Partially it has arisen because the FPC was designed as part of a ‘new economic model’ based on rising business investment, savings and exports. The problem now is that Osborne has abandoned his attempt at rebalancing and is instead focussing on something that looks rather like the ‘old economic model’.
But the real issue is that the Chancellor has given the Bank a series of herculean tasks. He wants growth boosted but he is not prepared to use fiscal policy to do this, so the Bank is finding itself set with a whole series of targets – meet the inflation target, ensure banks are safer and also do all that is necessary to boost growth. It is unclear to me whether the Bank can achieve this.
If nothing else this week’s spat reinforces my own believe that the most effective way to support the ‘near-term economic recovery’ is through fiscal policy.