June 4, 2014 / 5:31 PM / in 4 years

Don't expect all-knowing BoE to eliminate bubble risks: policymaker

LONDON (Reuters) - The Bank of England’s new risk watchdog, which this month will consider what to do about Britain’s surging housing market, cannot be expected to eliminate the risk of asset price bubbles, a senior policymaker said on Wednesday.

The BoE’s Financial Policy Committee (FPC) is still an experiment using untested tools, said Richard Sharp, an external member of the FPC.

The committee, which next meets on June 17, is under pressure to cool Britain’s property market where prices are rising by double digits in some areas.

Some economists see a bubble in London already although there have been some signs of a cooling of the market as tougher home loans rules introduced in April bite.

BoE Governor Mark Carney said last month that housing was the biggest threat to Britain’s economic recovery.

“We are not responsible for house prices. We are responsible for financial stability,” Sharp told students at the London School of Economics. “We will look at the nation as a whole because sometimes it’s too easy to be preoccupied with the consequences of foreign buyers in London. With respect to when and if we act, the approach should be graduated,” he said.

Sharp, a former banker of 23 years at Goldman Sachs, sought to downplay expectations about the committee’s ability to tackle bubbles with precision.

“When it comes to evaluating the FPC, please do not expect an omniscient committee which, by their collective capabilities, can always successfully anticipate shocks,” Sharp said in his first speech as an FPC member.

“Whilst we will do our best to anticipate shocks and minimize the possibility of them arising, it is better that the FPC should be viewed as unequivocally accountable for ensuring that, when such shocks do occur – and indeed they will – the system has built up sufficient strength and resilience so that such events can be effectively managed.”

The FPC, launched in April 2013, can use so-called macroprudential tools, such as forcing banks to hold more capital, in a bid to deflate bubbles without the need to raise interest rates.

“When using its tools, the FPC aims to take graduated and proportionate action, where possible. The committee has stressed this approach, for example, when considering risks stemming from the housing market and the set of tools that it could deploy to manage these risks as, and if, they emerge,” Sharp said.

He said the conduct of macroprudential policy was vitally important but is also particularly challenging.

He also said it was hard to identify the build-up of systemic risks and there was a lack of empirical evidence on how effective macroprudential tools are.

Economic history is a useful reminder that seeking to “forecast future market directions or developments is invariably an extremely hazardous exercise.”

Macroprudential policy should focus on keeping the wider financial system resilient so that it can deal with any unexpected shocks, Sharp said.

The challenges facing the FPC include risks around economic recovery, the need for banks to make progress in building up their capital buffers, and the impact on asset prices if interest rates rise quickly, he said.

It was perfectly conceivable that new shocks or difficulties were just around the corner, Sharp added.

Editing by William Schomberg and Robin Pomeroy

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