Bank boss Paul Fisher hints at lighter touch regulation to drive the recovery

Speaking to The Scotsman during a visit to Scotland in which he met business leaders to canvass their views, Fisher said the UK economy was essentially flat and a modest recovery should kick in next year. “We will see real income growth again, and that should boost consumption,” said Fisher. “Once businesses see that they will want to expand. It just seems to have been a long time coming.”

Fisher was speaking shortly after the International Monetary Fund slashed its economic forecasts for Britain, predicting a 0.4 per cent contraction this year and 1.1 per cent growth in 2013.

Fisher said the new approach to regulation was already helping to get the economy moving.

The financial policy committee (FPC), which is gearing up to take over ultimate regulatory control of Britain’s banks when the Financial Services Authority (FSA) is split up in January, has already intervened to ensure the maximum amount of cash from the UK government’s Funding for Lending scheme is passed on to businesses through a relaxation in the approach to liquidity and capital requirements.

Fisher said: “The objective is to stop the party from getting out of hand, but we are starting at the hangover stage.

“We are having to design a new framework for policy at a time when we don’t want to restrict the growth out of recession.”

New powers will allow the Bank of England to ease capital requirements on lenders at a time when it feels money needs to flow into the economy, and tighten them again if it appears to be overheating. It will also be able to intervene where it suspects asset bubbles are forming, such as runaway property prices.

Under the new system, the FPC will regulate “macro-prudential” issues that may threaten economic and financial stability, a role aimed at avoiding a repeat of the financial crisis and the need to bail out banks with public money.

A new Prudential Regulation Authority, also part of the Bank of England, will carry out “day-to-day” regulation of financial institutions. Consumer issues will be dealt with by a separate body.

Fisher admitted that the Bank of England’s powers will still be limited by wider EU agreements on banking liquidity, such as the Basel III rules.

In a speech to the London School of Economics last night, Bank of England governor Sir Mervyn King questioned the bank’s previous reliance on inflation-targeted monetary policy alone, saying a system such as that now being introduced could have prevented the worst of the financial crisis.

“With hindsight, before 2007 there should have been a cap on the leverage of banks,” he said. “And the cap should have tightened as asset prices increased and the likely exposure to losses increased.

“That is why we now have a macro-prudential policy regime in the UK.”