The Bank of England should force banks to set aside more capital to support lending in a downturn, former policy maker Charles Goodhart said on Friday.
The countercyclical capital buffer is currently set at zero and while the Financial Policy Committee has said it intends gradually to increase the level to 1 percent, Goodhart said such a level is “peanuts” and “ought to be increased by a massive factor.”
The BOE’s buffer plans have already come under fire from John Vickers, who led the Independent Commission on Banking. Officials — who are currently consulting on the right level for the systemic risk buffer — hit back at his analysis, saying they’re proposing a higher level of capital and resilience than suggested by the ICB’s final report.
“I don’t think that the kind of adjustment ratios, the scale of the proposed adjustment in capital, are going to do the job,” Goodhart told a National Institute of Economic and Social Research conference in London. “Macropru is a lovely idea but will it be applied strongly enough to succeed? My answer is that I very much doubt it.”
The FPC’s next meeting is on Wednesday and Chancellor of the Exchequer George Osborne this week asked the 10-member committee to keep an even closer eye on the risks to Britain’s economy. Stability officials will probably discuss whether to increase the countercyclical buffer for banks and housing threats stemming from buy-to-let properties.
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Goodhart said the FPC needs to develop and test a proper reaction function. Central banks including the BOE also need to have better analysis of macroprudential policy if they are to convincingly meddle in such political areas, he said.
“How can you tell the young house-buyers that they’re not going to buy a house unless they put down a much higher deposit? The answer here I think is you need much more decent analysis,” he said. “You’re going to have to have measurement requirements. The central banks are going to have to actually say that ‘our study of the past implies that when credit is growing faster than whatever, housing prices are doing this and so on, that that means we’re going to have to take tighter steps’.”
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