LATEST ARTICLES

David Aikman

09 December 2021

We take stock of the cumulative effect of the various changes that have been made over time to the Financial Policy Committee (FPC)’s mandate via the Chancellor of the Exchequer’s annual “remit and recommendations” letter.  Our focus is on what impact has there been on the relative balance between promoting resilience and stability versus pursuing other government policy objectives, including promoting financial innovation, the role of the City of London and so on.

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Dame Kate Barker

22 November 2021

The Financial Policy Committee views the housing market through the particular lens of financial stability, as its remit largely dictates. There is a risk that the consequent policy stance will increasingly rub up against other Government policies (such as increasing the rate of home-ownership, or some interpretations of the levelling-up agenda). Many believe, though this is not uncontested, that the UK has a housing crisis. But there is less agreement about how this crisis might be resolved, not least due to a lack of clarity about what would constitute a well-functioning housing system.

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An exchange between Charles Goodhart, Jeremy Bulow and Paul Klemperer on Jeremy and Paul’s recent paper, ‘Misdiagnosing Bank Capital Problems’.

12 November 2021

There has been a recent, important, paper by Bulow and Klemperer, entitled ‘Misdiagnosing Bank Capital Problems’.  They argue (p.1) that “the regulatory system’s emphasis has been on more insurance rather than more capital”. Consequently, they note (p.3) that “Regulatory forbearance creates especially low capital requirements for the toxic assets that are the riskiest, encouraging insured banks to retain loans that would otherwise be sold and then, for ‘debt overhang’ reasons reject good new loans”.

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Professor Rosa M. Lastra

25 October 2021

The 2007-09 global financial crisis challenged many pre-existing conceptions about systemic risk, including the ‘composition fallacy’ which assumed that if individual entities were robust and subject to adequate micro-prudential supervision, then the whole system would be resilient. This assumption proved to be misguided. Thus, in response to the need to monitor and control systemic risk, the ‛macroprudential’ approach has become one of the defining features of the post-crisis financial reform agenda (together with new resolution tools, enhanced capital and…

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Donald Kohn
15 October 2021

Implementing robust macroprudential policy—addressing threats to financial stability beyond those that were the focus of safety and soundness on an institution-by-institution basis or of investor protection market-by-market—was a constructive outcome of the legislative and policy response to the global financial crisis of 2008-09. In the US, the Dodd-Frank Act of 2010 strengthened the hand of the Federal Reserve as it addressed the systemic risks in banks & bank holding companies, including those emanating from institutions that were “too big” or “too systemic” to fail.

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Richard Barwell
27 September 2021

There is a problem with macroprudential policy. The two core building blocks of an economic policy regime – a model of the system and a loss function to guide policy decisions – are missing.  Without a reliable model of the system, policymakers cannot forecast with any accuracy how that system will behave in the future or how it will respond to policy interventions. Without a loss function, policymakers are unable to evaluate outcomes and hence whether they are making the situation better or worse.

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Sir Paul Tucker
13 September 2021

Macroprudential policy is (supposedly) the dynamic component of financial stability policy. Leading researchers recently described its purpose as being to “moderate the procyclicality of the financial system and thereby secure the resilience and stability of the financial system as a whole.”
There is a good deal to be said about that, including whether any country with an international finance centre is operating a policy anything like it (no), and whether they should if they could.

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