FPC ready to burst any new credit bubble

LONDON Wed Sep 4, 2013 9:04pm BST

The Bank of England is seen in the City of London August 7, 2013. REUTERS/Toby Melville

The Bank of England is seen in the City of London August 7, 2013.

Credit: Reuters/Toby Melville

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LONDON (Reuters) - The Bank of England's risk watchdog will not shy away from playing party pooper if parts of the financial system start overheating, a senior official at the central bank said on Wednesday.

The warning comes ahead of a quarterly meeting of the BoE's Financial Policy Committee, tasked with nipping risks in the bud. The partially government-sponsored revival in some parts of the UK housing market is a possible topic.

The UK government has introduced a series of measures to spur the property market, helping prompt rises in house prices that have both encouraged hopes of a broader economic recovery and worries it would simply result in another credit bubble.

BoE Governor Mark Carney said last week it would be a "challenging task" to avoid any overheating of the housing markets in the face of government stimulus but he was ready to head off any risk.

In his speech on Wednesday, Andrew Haldane, the central bank's director of financial stability and FPC member, made no mention of any specific measure or sector.

"The macro-prudential actions of the FPC will not always be popular," Haldane said.

"But financial policy is not a popularity contest... Party-pooping accusations have come thick and fast through this crisis, some faster and thicker than others."

The FPC is one of a new breed of macroprudential watchdogs, with counterparts in the United States and European Union to spot the broader asset bubbles regulators missed in the run up to the 2007-09 financial crisis until it was too late.

Since April the FPC has the power to force banks to hold more capital across the board or against their activities in a specific sector, such as home loans to cool things down.

Haldane said it was essential that institutions like the FPC are kept independent of government as regulatory action tends to focus on staunching the sources of credit.

"But this pits regulators against a powerful and well-heeled coalition of potential losers, often resentful of those removing the party's punchbowl," Haldane said.

He said the FPC may wish to help keep the system stable in other ways, such as reviving securitisation to help create a more diverse financial system.

Securitisation, whereby bonds are created with interest paid from a collection of underlying loans, was discredited when mortgages went unpaid in the United States in 2007, sending such securities crashing and ushering in the global financial crisis.

(Reporting by Huw Jones; editing by Patrick Graham)

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