4 June 2003

Promoting Financial Stability in the UK

Promoting financial stability is a key Government objective. A stable and efficient financial sector is important in its own right. But financial stability is a crucial factor for macroeconomic stability, and is also vital to the efficient conduct of monetary policy.

In 1997 significant changes were made to the UK’s monetary and financial stability policy frameworks. The Bank of England was given operational independence in relation to monetary policy and plans were set out for consolidating the main financial regulators into a single statutory body, the Financial Services Authority. In parallel, the arrangements for co-ordinating policies relating to financial stability were strengthened. These arrangements are described in the document Financial Stability: Memorandum of Understanding.

The Memorandum of Understanding

The Memorandum of Understanding establishes a framework for co-operation between HM Treasury, the Bank of England and the Financial Services Authority (FSA) in the field of financial stability. It sets out the role of each institution, and explains how they will work together towards the common objective of financial stability. The division of responsibilities is based on four guiding principles:

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  Clear accountability.  Each institution must be accountable for its actions, so each must have unambiguous and well-defined responsibilities; 
  
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  Transparency.  Parliament, the markets and the public must know who is responsible for what;
  
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  No duplication.  Each institution must have a clearly defined role, to avoid second-guessing, inefficiency and the duplication of effort. This will help ensure proper accountability;
  
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  Regular information exchange.  This will help each institution to discharge its responsibilities as efficiently and effectively as possible.
  

The Bank of England is responsible for the overall stability of the financial system as a whole. The FSA is responsible for the authorization and supervision of financial institutions, and for the supervision of financial markets and clearing and settlement systems. It is also responsible for regulatory policy in these areas. The Treasury has responsibility for the overall institutional structure of regulation and the legislation that governs it and, should the need arise, for deciding whether public funds should be used in responding to a crisis.

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The Standing Committee

The establishment of a Standing Committee was one of the key elements of the Memorandum of Understanding. The Committee formally comprises the Chancellor, the Governor of the Bank of England and the Chairman of the FSA. This committee meets on a monthly basis at deputies’ level to discuss individual cases of significance and other developments relevant to financial stability. Meetings can also be called at other times by one of the participating institutions if it considers there is an issue that needs to be addressed urgently. Each institution has nominated representatives who can be contacted, and meet, at short notice.

Most work on financial stability conducted by the Standing Committee has to remain confidential:

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  because of constraints under EC and UK law on the disclosure of regulatory information;
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  because the publication of agendas could discourage, for example, private sector practitioners and foreign financial authorities from supplying information to HM Treasury, the Bank and the FSA on an informal basis; and
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  because the disclosure of a Standing Committee interest in a particular issue could in some circumstances exacerbate problems which the Committee is seeking to avoid.

But the topics it focuses on, in general terms, include:

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  risks specific to a particular financial institution, or group of similar institutions, at home or abroad;
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  risks emerging from structural features of the financial system;
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  sectoral or geographical risks;
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  risks arising from economic conditions;

operational risks, such as those associated with Y2K and, more recently, with the possibility of contingency planning caused by very large terrorist actions. In some cases, disclosure about such risks may be less sensitive – for example, a Standing Committee website ( www.financialsectorcontinuity.gov.uk ) describes certain aspects of its work on issues raised by disruption.

The Standing Committee has also recently steered the UK’s input to the International Monetary Fund’s Financial Sector Assessment Program (FSAP). The FSAP assessed the UK’s financial stability arrangements and the robustness of its financial services sector.

The Financial Stability Forum

In addition to the Standing Committee, HM Treasury, the Bank of England and the FSA are also members of the Financial Stability Forum (FSF). The FSF is an international body that brings together various national authorities responsible for financial stability, in order to co-ordinate their efforts in promoting international financial stability, improve the functioning of markets, and reduce systemic risk.

Conclusions

The new arrangements in the area of financial stability have meant that the UK authorities are well placed to deal with any threats as they become apparent. In the Financial System Stability Assessment Report published in February 2003 the IMF commented:

“The UK’s large and sophisticated financial sector features fundamentally sound and highly developed financial institutions, markets and infrastructure. It is supported by a financial stability policy framework that has been significantly strengthened in a number of ways in recent years, and that in many respects is at the forefront internationally.”

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