Financial stability and the UK authorities

Financial stability requires the Treasury to work with the Bank of England and the Financial Services Authority (FSA). Collectively, these three bodies are usually referred to as the UK Authorities.

The Treasury chairs the Standing Committee – comprising the Chancellor of the Exchequer, the Governor of the Bank of England and the FSA Chairman – which is the main forum for agreeing policy and co-ordinating action across the three Authorities. Relevant publications include the Bank of England’s biannual Financial Stability Report, and the FSA’s annual Financial Risk Outlook, as well as the collective work of the national Authorities on financial sector continuity.

The Authorities also participate in financial stability issues internationally. They are members of the international Financial Stability Board (FSB), set up by the G20, and signatories to the European Memorandum of Understanding – a document that details how national Authorities should communicate and co-operate in the event of a cross-border financial crisis.

The current framework to ensure financial stability is available to download as follows:

Financial Stability: Memorandum of Understanding (PDF)

Financial stability in the future

A key priority of the Government, however, is to make necessary, lasting reform to combat threats to financial stability and help prevent those crises occurring in the first place. It believes that the current system of financial regulation is no longer suitable and needs to be replaced with a framework that promotes responsible and sustainable behaviour.

The Bank of England will be given new powers to protect and enhance financial stability. The Government will create a new Financial Policy Committee (FPC) within the Bank, which will look at the wider economic and financial risks to the stability of the system. This Committee will be equipped with specific macro-prudential tools it can use to address risks and vulnerabilities it identifies.

In advance of legislation to enact these reforms, an interim FPC has been established by the Treasury and the Bank. This body will undertake, as far as possible before formal legal powers are created, the permanent FPC’s role to identify and monitor risks to the financial system as a whole, in addition to vital preparatory work and analysis into potential macro-prudential tools.

Press notice: Government announces appointment of external members to the Interim Financial Policy Committee

In making these reforms, the Government intends to put the long-term structure of financial services and continued financial stability at the heart of its financial services policy agenda. As part of the new UK regulatory framework, expected to be in place by the end of 2012, the FSA will be abolished and its prudential supervisory powers transferred to the Bank. A new Prudential Regulation Authority (PRA) will be responsible for the day-to-day supervision of financial institutions that are subject to significant prudential regulation. It will adopt a more judgement-focused approach to regulation so that business models can be challenged, risks identified and action taken to preserve financial stability.

The Government is also establishing a powerful new Financial Conduct Authority.

In line with the Chancellor’s Mansion House speech, in July 2010, the Financial Secretary to the Treasury, Mark Hoban MP, launched the Government’s consultation on the proposed reforms. This consultation closed in October 2010.

A new approach to financial regulation: judgement, focus and stability: Consultation document, responses and a summary of responses

Building on this, the Government presented a further consultation on its proposals in February 2011. This consultation is live and will close on 14 April 2011

A new approach to financial regulation: building a stronger system

Financial stability and the UK authorities

Financial stability in the future

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