UK starts with its Financial Policy Committee

The Government and the Bank of England kickstarted (Govt. press release BoE press release) its innovative proposal of having a Financial Policy Committee along with MPC.  It is so far an interim FPC and will soon become a constitutional authority as well.  

The interim FPC will undertake, as far as possible, the forthcoming statutory FPC’s macro-prudential role. An important initial task will be to undertake preparatory work and analysis into potential macro-prudential tools. The Government’s consultation document states that the interim FPC “…will play a key role in the development of the permanent body’s toolkit by sharing its analysis and advice on macro-prudential instruments with the Treasury, to help inform the Government’s proposals for the FPC’s final macro-prudential toolkit”.

 The government also released a paper titled  – A new approach to financial regulation: building a stronger system. In this a new framework for regulating UK financial system is discussed.

There are three broad institutional changes:

  • the creation of an independent Financial Policy Committee (FPC) in the Bank of England;
  • the establishment of a new Prudential Regulation Authority (PRA) as a subsidiary of the Bank; and
  • the creation of an independent conduct of business regulator, the Financial Conduct Authority (FCA), which was formerly provisionally titled the consumer protection and markets authority.

Hmmm. Nice name given to consumer protection authority- Financial Conduct Authority..

In FPC, there will be a total of 13 members:

  • 7 members from UK’s various regulators and central bank
  • 2 non-voting members – chief of FCA and a Treasury Representative
  • 4 external members – for outside expertise

It has nominated Donald Kohn (former FOMC vice chairman) as one of the external members and three others.

Will be interesting to see and monitor these meetings.

Robert Peston has some more insights:

To sum up, the FPC is set to be given unprecedented powers over financial institutions en masse, over the financial economy as a whole. In terms of determining the long-term flow of credit, it may well turn into the most powerful body in the land.

Which is why checks and balances are being built into the new system.

The FPC will publish minutes of its deliberations (though it will have the ability to redact the most sensitive parts of its discussions).

It will be accountable to the Treasury Select Committee, in the way that the Monetary Policy Committee has been for years (is there a danger of the TSC becoming over-burdened?).

And what some will see as most important of all perhaps, there will be a legislative requirement on the FPC not to take actions that would “in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term”.

Here, of course, is the tension that the FPC will have to confront every waking minute: how to take risk out of the system without stymieing the supply of vital credit, or crushing those creative instincts of banks that are benign (some of you won’t believe this, but not all innovation by banks is an attempt to gull the customer).

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