A stable financial system is a key ingredient for a healthy and successful economy. People need to have confidence that the system is safe and stable, and that it functions properly to provide critical services to the wider economy. It is important that problems in particular areas do not lead to disruption across the financial system.
The FCA and the Bank of England (through the PRA) both have a statutory objective to ‘contribute to protecting and enhancing the stability of the financial systems of the United Kingdom‘. The Bank does this through its risk assessment and risk reduction work, market intelligence functions, payments systems oversight, banking and market operations (including, in exceptional circumstances by acting as lender of last resort), and resolution work to deal with distressed banks.
Financial stability is also a shared objective of the Bank, HM Treasury and the FCA. The Bank’s financial stability role is set out in a Memorandum of Understanding between the Bank, HM Treasury and the FCA. A high-level committee from these organisations — the Council for Financial Stability — meets regularly, focusing on managing systemic risk and protecting financial stability.
The Banking Act 2009 increases the responsibilities, powers and role of the Bank. A key part of the act is the creation of the Special Resolution Regime to provide the tripartite authorities with a framework to deal with failing banks. The act gives the Bank a statutory financial stability objective and creates a new Financial Stability Board to advise on and monitor the nature and implementation of the Bank’s financial stability strategy. In addition, it formalises the Bank’s oversight of payment systems and introduces a new framework for the issue of Scottish and Northern Ireland banknotes.
Growing cross-border financial activity heightens the importance of UK authorities working effectively with counterparts in other countries. The Bank has regular contact with central banks, regulators, and other authorities outside the UK that have an interest in the maintenance of financial stability. It also participates in the activities of key international bodies involved in global Financial stability work, such as the FSF.
Finally, the Financial Services Act 2010 had given the former regulator, the FSA, a new objective to contribute to protecting and enhancing UK financial stability. The FCA is now required to cooperate appropriately with the Treasury, the Bank of England and other relevant bodies in pursuing this objective. The act requires the FCA to have and review a financial stability strategy. It enables the FCA to gather information from entities including unregulated entities for financial stability purposes. It also requires the FCA to consider the impact that international events and circumstances could have on financial stability in the UK.
Financial Stability Board
The Financial Stability Board (FSB) was established in April 2009 as the successor to the Financial Stability Forum (FSF). In November 2008 the leaders of the G20 countries had called for a larger membership and the expanded FSF was re-established as the FSB with a broadened mandate to promote financial stability. The FSF was founded in 1999 by the G7 Finance Ministers and Central Bank Governors to recommend new structures for enhancing co-operation among the various national and international supervisory bodies and international financial institutions so as to promote stability in the international financial system.
The FSB has been established to coordinate at the international level the work of national financial authorities and international standard setting bodies and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. It brings together national authorities responsible for financial stability in significant international financial centres, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.
The mandate of the Financial Stability Board is to:
- assess vulnerabilities affecting the financial system and identify and oversee action needed to address them;
- promote coordination and information exchange among authorities responsible for financial stability;
- monitor and advise on market developments and their implications for regulatory policy;
- advise on and monitor best practice in meeting regulatory standards;
- undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, co-ordinated, focused on priorities, and addressing gaps;
- set guidelines for and support the establishment of supervisory colleges;
- manage contingency planning for cross-border crisis management, particularly with respect to systemically important firms;
- collaborate with the IMF to conduct Early Warning Exercises.
As obligations of membership, members of the FSB commit to pursue the maintenance of financial stability, maintain the openness and transparency of the financial sector, implement international Financial standards, and agree to undergo periodic peer reviews, using among other evidence IMF/World Bank public Financial Sector Assessment Program reports.
The FSB, working through its members, seeks to give momentum to a broad-based multilateral agenda for strengthening financial systems and the stability of international financial markets. The necessary changes are enacted by the relevant national financial authorities.