LONDON, March 28 (Xinhua) -- A member of the Bank of England (BOE) Financial Policy Committee (FPC) said Friday the central bank would seek to improve the diversity of market-based finance as a means of ensuring economic stability over the coming 18 months.
In a speech to the Chartered Institute for Securities and Investment in Liverpool, Dame Clara Furse said a primary aim was to make it easier for small and medium sized enterprises (SMEs) to access financing.
Furse, former chief executive of the London Stock Exchange, said the FPC should follow the lead laid down by the G20 nations in February, "Long-term private sector investment, particularly in infrastructure and SMEs, is fundamental to our economic future; this was also highlighted by the G20 in its February communique."
She added, "In particular, I would like to try to ensure that necessary mechanisms operating in the financial system to address specific risks do not, when taken as a whole, unduly damage the ability or willingness of investors to provide committed long-term equity funding."
Furse said the FPC would seek to promote a better functioning securitization market and to consider whether a credit register might support financial stability.
Furse added that it was important to enhance the resilience of liquidity in those financial markets important to the UK's financial resilience, and to reduce the risks to the system arising from pro-cyclicality in the availability of finance, including via collateral markets.
Furse highlighted four blocks to the availability of long-term equity finance.
The first was short-termism, driven, for example, by the use of mark-to-market accounting in sectors such as life insurance.
The second was the trend towards liability-driven investment among institutional investors, which, though in some circumstances rational, has been defensive and has probably put steady upward pressure on the cost of equity.
The third was non-bank financial investors who finance long-term "illiquid" assets with short-term liabilities, which may encourage investors with similar exposures to hold more short-term low-volatility liquid assets.
Fursse said the fourth was a UK problem from the tax treatment of debt and equity as providing a long-standing structural incentive to fund businesses with debt rather than equity.
"My concern is that frictions such as these could mean that the 'low for long' market interest rate environment is masking an underlying weakness in investor appetite for equity," she said.