07 November 2017

Bank of England: The Committee of Public Safety - speech by Martin Taylor

In a speech to the Institute of International Monetary Research, Martin Taylor, an external member of the Bank of England’s Financial Policy Committee (FPC), reviews the actions and policies of the FPC since its establishment.

He also considers criticisms that have been made of macroprudential policy, and discusses the way the FPC functions, drawing a distinction between the FPC and the Monetary Policy Committee.

The FPC’s contributions to the post-crisis reforms include recommending a leverage ratio for UK banks and establishing a framework to capitalise domestically important banks. But post-crisis regulation goes far beyond the capital stack and includes liquidity regulation, overhauled risk weights, the introduction of stress testing and the implementation of a credible resolution regime, which will be further enhanced by ring-fencing of retail banks.

In Martin’s view, the question of how much capital banks should have lies at the core of achieving safety without overreach.

“Answering it, therefore, requires an even-handed assessment of how the wider regulatory framework lightens the burden of the capital framework,” he says. For example, if the FPC did not believe that failing banks could be successfully resolved, or that structural reform and beefed-up supervision provided some protection, the FPC would feel the need to increase capital requirements on banks by around 500 basis points of Tier 1 capital. “Those who consider the present system onerous should reflect on this point.”

Turning to the issue of public accountability, Martin counters the charge that the FPC is not in a position to keep the public safe from financial crisis and cannot be trusted with the powers that have been granted to it, for example to tackle risks to financial stability from the housing market.

Addressing the criticism that the post-crisis increase in capital requirements has had a procyclical effect, and potentially restricted credit supply, Martin points out that risk aversion by borrowers and lenders played a much bigger role in this than regulatory changes, as small business loans account for such a tiny proportion of bank balance sheets that they are not especially sensitive to shifts in the capital regime.

Finally, Martin considers the way the FPC operates and how this differs from the Monetary Policy Committee. “The FPC has a different cast of mind: while the MPC concentrates on the central path for the economy and likely deviations from it, we are focused on tail risks, an activity which requires peripheral vision. And the FPC reaches the majority of its decisions (so far in its life, all of them) by consensus rather than by vote.”

However, Martin emphasises that consensus should not be taken to mean that the FPC is susceptible to groupthink. “Groupthink is not the failure of external members to argue with the Bank staff or stand up to the Governor because they are too idle, too cowardly or too thick. Let me assure you that this is very much not what goes on.”

Martin concludes: “I trust the serious and unglamorous work of the FPC in looking after a crucial aspect of public safety will endure. The times are turbulent and a responsible financial system, constrained by thoughtful and measured regulation, has a huge role to play. As a committee, let us continue to work on being humble in seeking public consent and on being bold in providing safety. And no, I don’t believe financial regulation has gone too far. No way.”

Press release

Speech

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