Speaking at the 20th Annual Hyman P. Minsky Conference in New York, Bank of England Deputy Governor, Paul Tucker, discussed the interaction of the UK's new macroprudential regime with domestic arrangements for microprudential supervision, with monetary policy and with new international arrangements.
Paul Tucker began by emphasising the importance to central banks of having mandates for both monetary and financial stability, given historical lessons from both sides of the Atlantic. He said that the new institutional framework in the UK, with the creation of the Financial Policy Committee (FPC), is "…plugging a gap between microprudential regulation and macroeconomic policy". But he admitted that the creation of such a body poses a number of questions, including how financial stability should be defined, what the FPC's objective should be, and what instruments they should control.
He said two key principles must underlie any definition of financial stability: confidence and resilience. They are reflected in a definition that has informed his contributions to the reform debate: “financial stability prevails where the financial system is sufficiently resilient, that worries about bad states of the world do not affect confidence in the ability of the system to deliver its core services to the rest of the economy.” Resilience, in his view, "…was badly neglected around the western world in the years running up to the current crisis". That is now being addressed, but "…is not a free good. There are trade-offs.” Therefore "…the authorities have to set standards of resilience suited to tail events, without impairing the wider functioning of the economy. But we also need to be equipped to raise the required standard of resilience in the light of changing circumstances, notably if we judge the world to have become more threatening than previously foreseen. That is the basis for macroprudential policymakers, such as the UK’s FPC, being able to deploy ‘cyclical’ instruments.”
He added that in order to achieve a resilient financial system, faultlines must be identified and addressed across all its component parts – firms, markets and infrastructure. Sometimes these faultlines are obscure. "A macroprudential authority needs, therefore, to be attentive to the complex ways in which the different parts of the financial system interact, generating leverage and liquidity risk."
This lead Paul Tucker to discuss the arrangements of the interim FPC, its objectives, instruments and scope. He notes that it will be ‘paving the way' for the future statutory functions of the Committee. It will advise the government on the instruments and powers the future FPC could be given. It will also ‘shadow’ its future role by advising the FSA on where and how it should use its tools for system-wide ends. He says that under the UK Government’s plan "…the FPC's main responsibility should be taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system". But he emphasises that this does not mean fine-tuning the credit-cycle, or preserving stability at the cost of long term growth. Moreover, the FPC's toolkit will include both ‘structural’ and ‘cyclical’ instruments, since ‘systemic risk’ embraces “…both faultlines in the structure of the financial system, ie the way its components are joined up; and cyclical threats from unsustainable levels of leverage, debt or credit growth”.
Paul Tucker concluded by emphasising that: "The reform of the financial system is a global endeavour." He says "…the UK has a special stake in the adequacy of international standards for financial firms and markets…" because it is "…probably the world's most international financial centre…" and "…many of the overseas firms active in the City are also active in providing services to parts of the UK's real economy". But, he adds: "In a world of global capital markets, it is unavoidably a shared enterprise. National authorities will fail unless we work together."
© Bank of England
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