The Financial Policy Committee published a Policy Statement in January 2014 explaining the powers for the FPC to give directions setting extra capital requirements for the purposes of financial stability. There is a statutory requirement for the FPC to prepare and maintain a general statement of policy for the powers of direction it is given under legislation. Please see the link below for the latest version of the FPC’s Policy Statement.
The FPC has Direction powers over sectoral capital requirements (SCRs), which the FPC can set in relation to exposures to specific sectors judged to pose a risk to the financial system as a whole, and has responsibility for setting the countercyclical capital buffer (CCB), introduced in the EU under the Capital Requirements Directive and Regulation (CRD IV/CRR). The Policy Statement describes these tools, the likely impact of using them on financial stability and growth, and the circumstances in which the FPC might expect to use each tool. It also describes the core indicators the FPC will routinely review to help inform its judgement.
FPC Core Indicators
Indicators will be useful for shaping the views of the FPC and helping it to explain its decisions publicly. No single set of indicators can ever provide a perfect guide to systemic risks, or the appropriate policy responses, and judgement will play a material role in all FPC decisions. But the Committee will routinely review the set of indicators below, which have proved helpful in identifying emerging risks to financial stability in the past. The FPC will regularly update these indicators, to help explain its decisions and to enhance the predictability of the regime. Please see the links below for the latest core indicators.
Countercyclical Capital Buffer Guide
The countercyclical capital buffer guide is a simple metric identified in Basel III and EU legislation, which provides a guide for the CCB rate based on the gap between the ratio of credit to GDP and its long-term trend. Legislation requires the Committee to consider this guide although there is no simple mechanical link between the guide and the setting of the CCB. As the Committee has stated in its Policy Statement on the CCB, it will use its judgement in setting the CCB, looking beyond the guide at a wider set of core indicators, other relevant metrics, supervisory and market intelligence and information from stress tests.