BoE on Fed Spillover

From fastFT,

The Bank of England has warned of potential volatility in flows of capital in and out of emerging markets should United States policy makers raise interest rates next week for the first time in nearly a decade.

The BoE’s Financial Policy Committee, which looks for threats to the UK’s financial stability, said it was still difficult to predict how markets might react despite a rise in the US Federal Funds rate being widely expected, writes Caroline Binham, financial regulation correspondent.

“Capital flows had been sensitive to diverging prospects for monetary policy around the world and there was a risk of further volatility in capital flows as that policy divergence progressed,” minutes read of the FPC’s most recent meeting in late November and released on Wednesday. “Though the likelihood of a tightening in policy by US policymakers was widely expected, the market reaction to any decision by the FOMC to increase interest rates remained difficult to predict.”

UK banks are particularly exposed to emerging markets, although they have decreased their holdings since last year. Their exposure to emerging market economies and Hong Kong totalled 340 per cent of their so-called Common Equity Tier 1, the safest kind of bank capital, the FPC said.

The BoE last week put banks on notice that it would likely force them to start building up a new buffer, called the countercyclical capital buffer (CCyB) from March in gradual increments to about 1 per cent. The buffer is intended to be built up in good times to draw down upon in bad.

Mark Carney, governor, said this would likely not involve more capital raising for most banks but rather a reallocation.

But that may change “soon” according to the minutes.

“There could be a case for such an overall increase soon,” the minutes read.

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