Sarah Breeden, who is currently the Bank’s Executive Director for Financial Stability Strategy and Risk [FSSR], has been appointed as Sir John Cunliffe’s successor as the Deputy Governor with responsibility for Financial Stability, starting on 1 November 2023.

Author: David Aikman

Published: 24 October 2023

Sarah Breeden, who is currently the Bank’s Executive Director for Financial Stability Strategy and Risk [FSSR], has been appointed as Sir John Cunliffe’s successor as the Deputy Governor with responsibility for Financial Stability, starting on 1 November 2023.

The Deputy Governor for Financial Stability is an important post. The person who occupies this role clearly has a significant influence on the direction of financial stability policy at home. But there is also scope for the DG-FS to steer the policy debate on the global stage.

We thought that the point of succession was a sensible moment to step back and reflect on the key priorities on the financial stability policy agenda. But rather than give our own opinion we decided instead to consult the people who have contributed articles to this site since its inception in September 2021 and other contacts we know to be interested in financial stability policy. A number were kind enough to send us their thoughts. The following blog reflects the feedback we received, and where people gave their consent, we have attributed names to opinions.

Stress testing

Stress testing is a critical element of the macroprudential toolkit. Stress testing frameworks have played an important role in the calibration of capital requirements and the assessment of the resilience of the banking sector to future shocks. The Bank of England’s stress testing framework includes two core scenarios: an ‘annual cyclical scenario’ (ACS), where the severity of the scenario is linked to the current state of the financial cycle systematically (the test is more severe in an upswing); and a ‘biennial exploratory scenario’ (BES) that will explore a specific topic that is not directly linked to the state of the financial cycle and is deemed to pose a latent threat to financial stability.

Dimitri Demekas argues that it is time for the Bank to re-think this framework, and, in particular, the design of the ACS. Demekas argues that the ACS is primarily designed to capture credit and market risk that stems from an economic downturn. In his view, the ACS “does not cover non-banks …  it is not designed to explore fully the liquidity-solvency nexus” and these risks to financial stability need to be incorporated more systematically into the stress testing framework.

Demekas acknowledges that the Bank has been investigating the risks around non-banks analytically for some time – indeed, in “an effort driven largely by Sarah herself in FSSR” – and that the so-called Biennial Exploratory Scenario or “BES” exercise could be used for this purpose, but the BES is very infrequent in his view.

Price stability and macroprudential policy

The decade or more that followed the global financial crisis was characterised by low rates of inflation in most advanced economies, most of the time. The monetary policy backdrop for the conduct of macroprudential policy over this period was therefore one of low and sometimes negative policy rates and periodic large-scale asset purchases that helped to keep long-term interest rates low, which in turn helped to inflate the price of a broad range of assets through the discount factor. Gulcin Ozkan highlights that the situation is very different now, with the surge in inflation triggering a rise in short- and long-term interest rates. Ozkan argues that the key challenge for macroprudential policymakers at this juncture “is how to ensure financial stability when price stability is at stake”.


On the same broad theme, one obvious priority right now is identifying the next institution or market that could buckle under the pressure of higher interest rates. Clearly, in light of the recent LDI episode, the obvious place for the FPC to start is by searching for potential liquidity and solvency issues within the non-bank financial sector.

Helen Thomas notes that the only institution that is yet to suffer a “run” in recent memory is an asset manager. In her view, the key focus should be on the product that suffers the most from a liquidity mismatch: the ETF. Thomas highlights that whilst there have been stress tests of asset managers and there has been analysis within policy circles on the risks inherent in open-ended funds, that offer daily liquidity to investors when the fund is invested in potentially illiquid assets, “not enough has been done on systemic spillover effects from a redemption intensive fire sale”.  


The creation of a credible resolution framework was a key plank of the post-crisis reforms, to once and for all eliminate the perception that systemically important institutions are “too big to fail”. Progress has been made: the Bank’s Deputy Governor for Market and Banking declared last year that “today a major UK bank could enter resolution safely: remaining open and continuing to provide vital banking services to the economy.”

Unfortunately, as Patrick Honohan notes, the picture looks less rosy on closer inspection.  The Bank’s assessment was “hedged around with caveats” and the situation is no better abroad. Honohan highlights that “it is a bit concerning to see that implementation of resolution in other countries has not so far been working very well, even where official statements of assurance … have been made stating that resolution plans are ready to be activated”. The question is, when the moment of crisis comes, will policymakers ever have the courage to put a large systemically important institution through the resolution process.

The fate of Credit Suisse is symptomatic. The recent FSB report reaffirms the confidence of the global policy community in the resolution framework, noting that it provided the Swiss authorities with a executable strategy but they chose an alternative approach.  Honohan argues that resolution would have been the better option but notes the stated concerns of the Swiss authorities that “it was doubtful that this option would have restored the necessary confidence.”

Honohan’s broader concern is that resolution planning can seem a thankless task at the best of time – for both the resolution authority and the regulated institutions – but “how much more thankless if it is never to be refined to the point where the Bank can be confident that it will be effective in restoring confidence and maintaining essential public services”.  He notes that the FPC is not responsible for activating the resolution process, so Sarah Breeden’s new role does not put her directly in the spotlight, but resolution is ultimately a gubernatorial responsibility and likely to be a collective decision, so this issue belongs in her in-tray.

Housing and HtB

There is clearly a financial stability concern around the potential for higher mortgage interest rates to trigger a substantial correction in house prices. In the view of one of our contributors, the risks here are likely to be mild, however in his view it was important for the Bank and the FPC in particular to demonstrate that “they are on the case”.

Another one of our contributors highlighted a more specific housing market concerns: around the Help to Buy (HtB) scheme. Help to Buy was an equity loan scheme that was designed to help people at the bottom end of the housing ladder and in particular for first-time buyers. A key feature of the scheme was that participants did not have to pay interest on their equity loans for the first five years of the loan. But with around 50,000 households taking out these loans in both 2018 and 2019, Kate Barker notes that an increasing number of the households will now be approaching the end of that first five-year grace period at the worst possible time given the shift in the stance of monetary policy over the intervening period.

On top of the much higher mortgage rates that they will already (or soon) be facing on the balance of their loan, the HtB households will now have to start paying interest on their equity loans as well – at a rate that is linked to RPI (for loans that were taken out between 2013 and 2021).  There is obviously a risk that these some of these households will find themselves in financial difficulties.  As Barker highlights “the assumptions about income growth and inflation which suggested this transition from interest-free would be easily managed may now look less robust”.

Furthermore, Barker flags that if there is a meaningful increase in financial distress amongst HtB borrowers then that may lead to issues in certain local housing markets, given that many new build sites had a high concentration of these HtB purchases.

Conduct and culture in banks

Several of our contributors flagged issues regarding what they see as unfinished business in the area of conduct and culture in the banking sector.

Alan Brener argues that while the current members of bank boards may be more competent than many who served in the period leading to the Global Financial Crisis it is still not clear that there is both sufficient expertise and the necessary time available given the many demands of the role. For example, Brener poses the rhetorical question “do a sufficient number of non-executive directors have up-to-date IT and banking operational processes experience and expertise?

What then should be done? Brener laments that there seems to be little regulatory encouragement for executive and non-executive directors to undertake professional training along the lines of the Certified Bank Director programme run by the Irish Institute of Bankers.

Brener considers that a greater regulatory focus is required on the broad issue of culture and ethics within banks, which he believes are central both from a micro- and macroprudential perspective. However, his initial research suggests that this is an area of limited focus by supervisory teams in their day-to-day work.

Charles Goodhart and Rosa Lastra propose a “back to the future” solution to what they see as the unresolved moral hazard problem for senior bank executives: the need to realign bank incentives in a world where increased issuance of term subordinated debt and higher regulatory ratios can only achieve so much. Instead, they advocate a return to a world in which senior bank executives and controlling shareholders would face multiple, or even in the case of the CEO unlimited, liability. They argue that a pragmatic way to implement the scheme is to offer SIFIs the choice between adopting their proposal or facing much higher capital requirements instead.

Goodhart and Lastra argue that the extent of the liability of these individuals should be a linked to two key criteria: their access to inside information on the state of the institution and their ability to influence decisions that impact the balance sheet and business model. They have a two-tier categorisation in mind for defining insiders: all those who are on the Executive Board, or are a Chief of a Division, or who earn a salary in excess of 50% of that of the CEO would be treated as an insider.

The scheme is focused upon systemically important banks where there is an immediate concern about realigning incentives, but Goodhart and Lastra note that if the proposal proved successful then in theory it could be rolled out to other financial institutions and in principle to all public corporations.


Several of our contributors highlighted concerns around central clearing counterparties (CCPs).  Clearly, the process of transferring derivative transactions to CCPs has made the financial system more resilient. A complex web of bilateral exposures has been replaced by a simpler ecosystem through the process of novation, where the CCP interposes itself between the counterparties of each trade, and multilateral netting, where a potentially large number of exposures for each counterparty can be reduced down to a single net exposure to the CCP.  As Steve Cecchetti observes, with the benefits comes a potential risk:

reducing the linkages among intermediaries and gross liquidity needs, establishing collateral standards, and making risk concentrations more transparent. But in the process, we have created critical systemic institutions. In fact, the 600 trillion dollar derivatives runs almost entirely through two of these, one of which is based in London.”.

The specific concern raised by Cecchetti is the procyclicality of their risk management in a moment of stress: raising collateral requirements during periods of heightened volatility and demanding fresh capital from members in a crisis. This is a classic example of the privately rational defensive actions that institutions that prove counterproductive at the system level which macroprudential policy is designed to counter. Cecchetti suggests one possible course of action: “should capital requirements for CCPs be raised in good times so that they do not need to call on the capital of their members in a crisis?”.  On the same theme, Alan Brener queries the level of macroprudential oversight that is in place for what are super-systemically important institutions.


Finally, Kate Barker highlighted the potential risks to financial stability that may arise as a result of the transfer of defined benefit pension schemes to a relatively small number of insurance companies. She argues that “the insurers are now incentivised to invest in slightly risker assets” with the potential for herding around particular strategies, such as corporate credit.


  • David Aikman

    David Aikman joined King’s Business School in April 2020 as Professor of Finance and Director of the Qatar Centre for Global Banking and Finance. He spent 17 years working as an economist at the Bank of England – most recently in the Technical Head of Division role in the Financial Stability Strategy and Risk Directorate. He led the Bank’s work on various macroprudential issues.

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