Reform of the UK Financial Policy Committee
| DOI | http://doi.org/10.1111/sjpe.12228 |
| Author | Alfred Duncan,Charles Nolan |
| Date | 01 February 2020 |
| Published date | 01 February 2020 |
REFORM OF THE UK FINANCIAL
POLICY COMMITTEE
Alfred Duncan* and Charles Nolan**
ABSTRACT
We argue that: The FPC should have a wider remit; a much broader member-
ship (covering many specialisms); should be wholly independent of Government
and outside the Bank of England; its aim should be to comment publicly and
authoritatively on any possible areas of risk to financial stability while itself con-
trolling few, if any, levers of policy. The rationale for these conclusions is that:
Macroprudential/financial risks come from many sources; many of these sources
are structural and outside of the Bank’s regulatory purview/competence; in a
sense, the Bank gets to mark its own homework as regards issues such as the
SMR, resolution, appropriateness of capital, effectiveness of ring-fencing etc.;
many aspects of macroprudential actions have distributional implications, and
hence, politicians, not the Bank or any other body, should take and justify, or
not, these decisions.
IO
BJECTIVES AND CHALLENGES OF MACROPRUDENTIAL POLICY
As a result of the 2007–2008 financial crisis, many policymakers would now
argue financial regulation and macroeconomic policy are joint policy prob-
lems. In practice, that has led to few, if any, substantive changes to monetary
and fiscal policy rules. It has led to many changes in the financial supervisory
architecture and a macroprudential perspective may become a key component
in economic policy.
The United Kingdom has been at the forefront of developments. Along
with the global move towards increased capital and liquidity requirements for
banks and other financial intermediaries, the enactment of the Vickers Com-
mission proposals and the reorganization of the Bank of England, in particu-
lar the establishment of the Financial Policy Committee (FPC), have been
amongst the most striking institutional developments anywhere. The FPC,
whose statutory responsibility is to aid the Bank in enhancing the stability of
the UK financial system, has also been granted additional, far-reaching pow-
ers, such as those to limit aggregate bank exposure to the property market.
*University of Kent
**University of Glasgow
Scottish Journal of Political Economy, DOI: 10.1111/sjpe.12228, Vol. 67, No. 1, February 2020
©2019 Scottish Economic Society.
1
In this paper, we argue that an optimal macroprudential framework ought to
concern itself with issues somewhat wider than countercyclical capital buffers,
leverage ratios and the like. Not only is the intersection between micropruden-
tial and macroprudential measures larger than typically acknowledged, macro-
prudential oversight ought to have in its purview to assess the efficiency of the
financial system and its constituent parts and recommend action. Macropruden-
tial regulators should be actively concerned with a wide range of policy areas
such as corporate governance, competition and tax policy. The significance of
these areas for macroprudential policy follows directly from a concern for finan-
cial efficiency since the larger are the wedges of inefficiency, the more damaging
negative shocks to and from the financial system are likely to be.
To be clear, we are not proposing that the current FPC takes on huge extra
responsibilities, devises lots more rules, much less becomes an ‘omni-regulator’!
Rather, the hope is the opposite and that by helping to identify key areas of inef-
ficiency in the financial system, fewer ad hoc policy adjustments may be
required. We outline some specific proposals at the end of the paper which
would help, in our view, to improve the UK framework. These would give the
FPC an influential voice in identifying potential problems facing financial stabil-
ity while in many instances leaving decisions on policy remedies with politicians
or other authorities.
1
However, clearly any extension of the FPC’s sphere of
influence (along with the Bank’s) has implications for accountability. As we sug-
gest, it may be that the FPC should not be located within the Bank of England.
Consequently, while there are indeed difficult judgements as regards stability
and efficiency objectives, as explained in Sargent (2011) and more recently in
Aikman et al. (2019), we argue that it is necessary to consider the joint design of
macroprudential institutions and macroprudential policies, something largely
overlooked in existing academic and policy discussions.
The argument in more detail
The conventional view of financial regulation is that microprudential regula-
tors try to induce efficient behaviour of regulated institutions, while macropru-
dential regulation knocks out any systemic externality leaving monetary policy
unencumbered by financial frictions. We argue that the issue is somewhat
more complicated.
Macroprudential policy confronts various externalities emerging from the
financial sector. In this paper, we focus principally on four, not all of which
have received equal amounts of attention in the literature. First, there are
what we term leverage externalities stressed by Fisher (1933) then later formal-
ized by Bernanke et al. (1999) and Kiyotaki and Moore (1997).
2
Next, there
1
At a recent conference to mark 20 years since the Bank of England was given indepen-
dence, a number of influential speakers raised concerns about the Bank’s independence and
autonomy. In part these concerns stem from what some, including the present authors, worry
is an over reliance under the current framework on the Bank to take what are in effect politi-
cal decisions. See the discussion below.
2
Leverage concentrates the losses associated with business cycles on debtors, encouraging
fire sales that further depress asset prices and economic activity.
2ALFRED DUNCAN AND CHARLES NOLAN
Scottish Journal of Political Economy
©2019 Scottish Economic Society
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