Financial Policy Committee
About the Financial Policy Committee
When the financial crisis hit the UK, there was not really any organization responsible for looking at the entire financial system and looking out for buildups of risk that could cause a crisis. The same was true in the U.S. In each case, different regulators were watching different parts of the system (usually with responsibilities focused on specific institutions or markets). Two large banks in the UK failed and required taxpayer support.
The UK Parliament decided that a complete reform was needed and most of the regulatory authority was handed to the Bank of England as of 2012. Before then the Bank had one prominent committee, the Monetary Policy Committee, that set interest rates and conducted monetary policy.
With the reform two more committees of the Bank of England were created. One is the Prudential Regulation Committee (PRC) which is in charge of monitoring and supervising individual banks and insurance companies. The second is the Financial Policy Committee (FPC). The FPC is charged “with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The FPC has a secondary objective to support the economic policy of the Government that is charged with insuring the safety and soundness of the entire financial system.”
The FPC has the authority to introduce regulations and guidelines in order to meet its mandate. For instance, the committee decided to impose standards that all borrowers must meet in order to qualify for a mortgage. Likewise, the FPC has decided that individual lenders must limit the percentage of mortgages that they can grant to borrowers with very low down payments.
The FPC, together with the PRC, each year designs and conducts “stress tests” for the major banks in the UK. In these exercises, the banks are confronted with a hypothetical economic scenario that would challenge their profitability and are asked to describe how potential losses would affect their viability. Banks that perform poorly in the stress tests can be required to raise more funding that would allow them to cope with losses.
As a consequence of the Brexit referendum the FPC is monitoring the evolution of the financial system to make sure that it remains strong enough to continue to provide support to the economy and safe enough so that it will not create economic stress.
The membership of the FPC consists of the Governor of the Bank of England and five of his deputies, the head of the Financial Conduct Authority (the other financial regulator in the UK), five independent experts appointed by Her Majesty's Treasury, and an observer from the Treasury. The FPC is subject to oversight from the Treasury Select Committee of the House of Commons and FPC members routinely testify before that committee.
The FPC has four meetings a year in March, June, September and November. In the weeks just ahead of those meetings I participate in briefings that require me to be in London. I expect to spend between 40 and 50 nights a year in London. However, I am still primarily based in Chicago and continue to teach and conduct research as I always have.
Twice a year the FPC supervises the production of a financial stability report for the UK. Those reports describe the committee's current view of the status of the financial system, judgments about potential threats to stability, and the outlook for future stability. The FPC also publically releases records that describe the decisions taken and issues discussed in each of its meetings.
I have been reappointed once and my final term on the committee will end on September 30, 2022.