And, to the extent conflicts occur, they are likely to best be resolved within a single institution through shared analysis and mutual understanding of reaction functions.15 Our strategy will be to conduct supervision as an integrated part of the central bank and not as a standalone supervisory agency that happens to be attached to a central bank. The benefits that close cooperation can bring were demonstrated in 2013 as the PRA and the FPC worked closely together to bring clarity both to banks’ existing capital positions, and the standards expected of them. The FPC mandated the exercise with a view to establishing a system-wide, transparent standard of resilience that would boost confidence and allow the banking system to contribute to economic recovery. The PRA – under Andrew Bailey’s leadership – delivered the recommendation for each of the major institutions. The resulting increase in capital ensured the core of the financial system was on a sound footing and made an important contribution to securing economic recovery. There were clearly lessons to learn from that exercise, most notably the importance of clarity of early communication by the Bank to financial institutions about the standards to which they would be held. Those lessons are being applied now in the first of the Bank’s annual stresstesting exercises, which will bring together the microprudential standards for banks with a macroprudential assessment of the risks to which they must be resilient. As with monetary policy, expectations matter and the system will be more resilient if the Bank’s moves can be anticipated.
The model used for monetary policy of decisions being made by a committee made up of both Bank of England executives and independent experts has been expanded to financial stability with the creation of both a Financial Policy Committee and a Board of Prudential Regulation. As I have argued, those policy committees will be more effective if they have access to the broadest range of the Bank’s analysis and information and are as well informed as possible about each other’s reaction function. The now very wide range of the Bank’s responsibilities also creates a need to strengthen the oversight arrangements for the Bank as a whole. For delivery of our statutory objectives, the Bank is accountable to the public, through Parliament’s Treasury Committee. That accountability is being reinforced. Parliament has created an Oversight Committee of 8 non-executives who are in the Bank but not of the Bank. The Government has today announced the appointment of Anthony Habgood to lead the Bank’s Court of Directors and the Oversight Committee. I welcome the appointment of someone of his depth and breadth of corporate experience. Independent oversight by the committee he will chair can strengthen the Bank’s legitimacy and effectiveness. The Oversight Committee has access to internal papers, is able to observe meetings of policy committees, and is responsible for reviewing all aspects of the conduct of the Executive of the Bank, including the delivery of policy, the design of and adherence to rigorous processes and procedures, and the monitoring of our transparency and openness.