UK calls on EU partners to set up risk watchdogs

LONDON, March 19 Mon Mar 19, 2012 8:38am EDT

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LONDON, March 19 (Reuters) - Europe should follow Britain's lead and set up national watchdogs to spot risks that could destabilise the economy, helping to build up knowledge of an "embryonic" policy area, a British government minister said.

Financial services minister Mark Hoban said on Monday the Bank of England's Financial Policy Committee (FPC) will publish later this week the tools it wants for nipping risks in the bud, adding the government's top priority was still boosting sustainable economic growth.

The tools could include caps on home loans and tailoring capital requirements to individual risks at banks, such as exposures to commercial property.

Forging a set of macro prudential tools is a core post-financial crisis reform to plug a supervisory gap of failing to spot broader risks from banks and other parts of the financial system before it was too late.

"We also believe macro prudential supervision needs to be mirrored in Europe. It's vital all national regulators have both macro prudential and resolution tools to address emerging risks," Hoban told a regulation event at Chatham House.

"We, like our international peers, are in the early stages of understanding how these tools would work. Our knowledge will only increase through shared experience," Hoban said.

The European Union has already set up a European Systemic Risk Board which has powers to make recommendations to countries. BoE Governor Mervyn King is vice chairman of the ESRB.

The FPC will have powers to direct UK regulators to take specific actions in a financial sector.

Hoban said there will be a public consultation on the FPC's proposed tool kit so there is a clear understanding of the tricky trade-offs that will be made between growth and reining in asset bubbles.

The committee will be responsible for "taking away the punchbowl" from overheated credit markets, Hoban said.

"The FPC will be taking decisions that have significant economic implications," Hoban added.

Balanced growth, built on sustainable debt, will still be the government's overriding priority and because of the "embryonic" nature of macroprudential tools, the BoE and FPC will also need to continue working on a set of indicators for financial stability to inform its work, Hoban added.

The FPC was the "final piece in the jigsaw of domestic regulatory reform" which also includes scrapping the Financial Services Authority next year and replacing it with a standalone Financial Conduct Authority and a new prudential supervisor for banks and insurers at the BoE.

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