Appendix I. Financial Policy Committee Meetings
Appendix II. Treasury Select Committee FSR Hearings
Appendix III. Bank of England “Core Indicator” Coverage by Source of Risk
Appendix IV. U.K. Macroprudential Toolkit
For the purpose of this note, “the microprudential regulators” refers to the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA).
The ESRB has recently released recommendations on an European Union (EU)-wide approach to reciprocating CCB rates set by authorities outside the European Economic Area (EEA) and a framework for facilitating reciprocity within the EEA for tools other than the CCB.
To date, these tools encompass the countercyclical capital buffer under Basel III, sectoral capital requirements, loan-to-value ratios (LTV) and debt-to-income ratios (DTI) on owner-occupied mortgage lending, and the leverage ratio, including a countercyclical leverage ratio buffer and a leverage surcharge for systemically important institutions.
The Technical Note was prepared by Nicolas Arregui from the IMF Monetary and Capital Markets department, for the 2016 United Kingdom FSAP. The analysis was based on publicly available information, background documentation provided by the BoE, the FCA, and the Treasury, as well as discussions with the BoE, ESRB Secretariat, FCA, PRA, Treasury, and academics.
In addition, the regulation of all systemic important infrastructure, including settlement systems and clearing houses, were transferred to the BoE.
The Bill received Royal Ascent and became an Act of Parliament in May 2016.
The BoE’s Court of Directors (Court) acts as a unitary board, setting the organization’s strategy and budget and taking key decisions on resourcing and appointments.
The purpose of financial stability is to contribute to avoiding serious interruptions in the vital functions of the financial system: the provision of payment and settlement services, intermediating between savers and borrowers, and insuring against risk.
The FPC is established as a sub-committee of the Court of Directors of the BoE.
Additionally, the Governor is required in legislation to meet the Chancellor following each financial stability report (FSR) to discuss matters relating to the stability of the U.K. financial system, with a public record of the meeting published within six weeks.
See Andrew Haldane’s and Don Kohn’s reappointment hearings at the Treasury Select Committee, 2013.
See FPC records for December 2015.
This number excludes the decision to keep the CCB rate at zero percent.
This is based on just the number of measures, not their relative importance or impact.
Given the concentrated nature of the U.K. banking system, the FPC sometimes uses firm-specific data to inform macroprudential policy decisions.
The BoE, the PRA, and the FCA are allowed to share confidential information with each other for the purpose of carrying out their respective functions.
Information collection powers also include entities connected to authorized entities and, in the case of the FCA, recognized investment exchanges.
The PRA may exercise this power to provide this data to other authorities, such as the FPC or the Treasury.
Note this would also affect the perimeter subject to information gathering powers.
Powers of direction are prescribed by the Treasury and approved by Parliament. However, an expedite process temporarily waiving the need for Parliamentary approval is in place in case of emergency (based on the Treasury’s stated opinion).
The FCA and the PRA’s chief executives are both members of each others’ respective Boards, as well as both being members of the FPC. The BoE Governor is the Chair of the FPC, the MPC, and the PRA Board.
The oversight of financial market infrastructures (FMI) sits within the BoE, headed by the Deputy Governor for Financial Stability who sits as an FPC member. The FPC can make, and indeed has already made, recommendations on issues relevant to financial infrastructures.
Andrew Haldane and Spencer Dale were appointed to take over each other’s positions, effectively exchanging the roles of Executive Director for financial stability (FPC member) and Executive Director of monetary analysis (MPC member). Additionally, Paul Fisher, former Executive Director for markets (MPC and interim FPC member) was appointed as Head Deputy of the PRA. More recently, in January 2016 it was announced that Andrew Bailey would be leaving his position as Head of the PRA to take over as Head of the FCA.
To promote a unified culture, the BoE’s leadership team has identified a set of core values to guide managers’ performance evaluation across the institution. Additionally, work has been done to harmonize remuneration terms and conditions across the BoE and therefore reduce barriers to internal mobility.
The Oversight Committee assessed that management and staff across different parts of the BoE have increasingly worked together to ensure that all policy committees receive coordinated briefing on macroeconomic, financial stability and prudential issues (see BoE Annual Report, 2014).
Maximum harmonized legislation, unlike minimum standards, means that member states cannot set tougher regulatory standards for firms in their jurisdiction.
Foreign branches operating in the U.K. account for roughly one third of the banking sector assets, two thirds of which correspond to non-EEA branches.
Authorities intend to adhere to ESRB’s recent recommendation to coordinate EEA reciprocity for the CCB vis-à-vis non-EEA authorities.
On the positive side, vesting a lot of authority in the BoE can harness its expertise in systemic risk identification, promote coordination and provide a shield from political interference.
Additionally, the FPC typically focuses on “tail-risks,” so if FPC actions successfully reduce the probability of a risk materializing, such that it does not occur, this may be observationally equivalent to the action being unnecessary in the first place and FPC concerns being unwarranted.
The Governor is required in legislation to meet the Chancellor following each FSR to discuss matters relating to the stability of the U.K. financial system, with a public record of the meeting published within six weeks.
Additionally, these indicators favor consistency and enhance the predictability of the regime.
Additional outlets include Quarterly Bulletin articles, working papers, and Bank Underground blog-posts.
At Spencer Dale’s appointment hearing by the Treasury Select Committee on April 30th 2014, the Committee Chair quoted a survey showing that only 11 percent of those interviewed had heard about the FPC (of which at least one third had a wrong impression of what its work consisted of).
As financial sector agents factor in this reaction function, they will likely adjust their behavior at an earlier stage in anticipation of FPC actions.
Based on the experience so far, each hearing is typically attended by the BoE Governor, a Deputy Governor, and two FPC external members (see Appendix 2). Occasionally, external experts may additionally be called to give evidence.
Analogous meetings are held with MPC members.
These are the same criteria that guide the suitability assessment for appointments to the MPC and the Office for Budget Responsibility (OBR). While the Treasury Select Committee has veto power on the appointments to the independent OBR, it does not have veto powers over the appointments to the MPC nor the FPC.
For instance, the Committee expressed concern about: Alastair Clark’s possible perception as an insider in his appointment to the interim FPC, Clara Furse’s awareness of the importance of asserting the independence of the FPC, and the process for appointing Spencer Dale as an executive director of the BoE (and an FPC member). The Committee noted in this last case an exception could be made because of the wider reorganization of the BoE’s that was being undertaken and the recent expansion of the BoE’s responsibilities. However, it expected the usual “fair and open competition” process to be followed in the future.
In practice, the Oversight Committee has held joint meetings with Court for most purposes, with the executive withdrawing when appropriate.
The Committee has a broader set of responsibilities that are not discussed in this section. For instance, its oversight responsibilities extend to other parts of the BoE, such as the MPC. The Committee is also charged with monitoring the response to its review reports and monitoring the implementation of accepted recommendations.
Technically, an external member of Court (and therefore a member of the Oversight Committee) may be appointed as an external member of the FPC. Indeed, Michael Cohrs was appointed as an external member of the non-statutory interim FPC while being a member of Court. Once his term as an external FPC member concluded, he continued to attend FPC meetings in his capacity as a member of the Oversight Committee. Going forward, it is important to watch for the potential conflict of interests this may represent.
However, publication may be delayed if judged to be against the public interest.
To date, these tools encompass the CCB under Basel III, sectoral capital requirements, loan-to-value (LTV) ratios and debt-to-income (DTI) ratios on owner-occupied mortgage lending, and the leverage ratio, including a countercyclical leverage ratio buffer and a leverage surcharge for systemically important institutions.
Naturally, core indicators are just a starting point and would not seek to cover every possible risk, but to provide consistent coverage of some sources of systemic risks that have historically been associated with crises.
In the case of liquidity risks, liquidity indicators could be made part of resilience indicators instead of the risk indicators.
Within the next three years, transaction-level data on securities financing transactions, such as repos and securities loans, will be collected under the Securities Financing Transaction Regulation, and data on the holdings of Central Securities Depositories to be collected under the Central Securities Depositories Regulation.
See FPC responses to the Chancellor’s remit and recommendations in June 2013, March 2014, March 2015 and August 2015.
By the time of the mission, the full details of the BoE’s activities-based framework to assessing risks in nonbank financial system had not been published. This section is based on the description in the FSRs, the FPC meeting records, and the discussion with authorities.
The PRA and FCA must not only comply but also do it as soon as practical and there is scope for the Treasury when establishing a power of direction to allow for the disapplication of procedural requirements for consultation periods if judged necessary.
Strictly speaking, the FPC’s power to set the UK countercyclical capital buffer is not a power of direction, as it is established through European law rather than the UK legislation that governs the FPC’s powers of direction.
In line with the CRR, the 100 percent LCR implementation will be reached one year ahead than required by the Basel standard.
PRA-regulated banks and building societies with core deposits greater than £25 billion will be subject to ring-fencing.
The framework is implemented in Europe through CRD IV/CRR.
The 2015 list of global systemic insurers includes two head-quartered in the U.K. (out of a total of nine): Aviva plc and Prudential plc.
Because the range for the systemic risk buffer as implemented in the U.K. is below three percent, the European framework requires notification but not authorization.
The flexibility of the G-SIB surcharge is materially less than for either the systemic risk buffer or countercyclical capital buffer: the PRA can only exercise supervisory judgment to move firms up or down by a single G-SIB bucket, and even this is subject to the approval of the Basel Committee / FSB.
These national flexibility measures require notification (establishing that the measure is necessary, effective and proportionate, establishing that other specified measures cannot adequately address systemic risk), and nonobjection by the European Council (based on opinions of ESRB and EBA). The process may take up to three months.
Sectoral capital requirements may be implemented in a variety of ways (Pillar 1, Pillar 2, or the national flexibility measures), each with different procedural requirements and implications for reciprocity.
International and EU definitions of the leverage standard for banks are to be agreed by end-2016, and authorities are working to preserve the flexibility to adopt additional buffers for countercyclical and systemic buffers for the leverage ratio.
Indeed, based on the analysis of risks in the sector, the 2016 UK FSAP main note recommends extending the FPC’s powers of direction for tools targeting the buy-to-let market.