Although to date most of the Interim FPC’s deliberations have concerned bank capital adequacy, I expect the FPC’s longer-term focus to be as much on the capital markets and, thus, the policies of the FCA. In a world where banks have been re-regulated, some risk taking will migrate to other parts of the system. It is, therefore, hugely welcome that the Bill currently before Parliament gives the FCA a statutory objective of helping to preserve stability. 9 That is going to be important, for example, to contain any systemic risks stemming from shadow banking, such as money market funds, or from fault lines in the trading infrastructure or disclosure regimes. 10 Sometimes a permanent fix will be needed. The FPC will be able to make recommendations to HMT to move the perimeter of microregulation, and to PRA or FCA to change their rules and policies. But sometimes it will be more a matter of choking off a transient burst of exuberance. Even where market participants become aware of the potential risks, a collective action problem can impede their taking their foot off the accelerator. A telling experience in the run up to the crisis was of Chief Risk Officers on Wall Street talking openly about a dilemma between what they called financial risk and business risk. On the one hand, the Street was taking a lot of financial risk, which could end in tears.
That is supplemented by three operational objectives, including “protecting and enhancing the integrity of the UK financial system” which is in turn defined in the legislation to include “its soundness, stability and resilience”. This is in line with Principle 6 of IOSCO’s objectives and principles for securities regulation: “the Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate”. 10 See Tucker (2011), “Building resilient financial systems: macroprudential regimes and securities market regulation”, International Council of Securities Associations. 11 This was highlighted by the Bank of England in 2006 Financial Stability Review p. 8: “Many may have believed that the price of certain assets had become too high and the premium for taking risk too low. But there are business risks associated with acting on that view when others are not; it may not only reduce profitability in the short run, but may also risk losing market share or failing to establish a foothold in a rapidly expanding market. These concerns often seem to have outweighed the risks to balance sheets associated with potentially overpriced assets. As a result, in the early part of this year, there appears to have been an extension of risk-taking activities by financial institutions, including some UK banks. “  BIS central bankers’ speeches  7  the system safe and sound has made real progress in recent years, but it is not complete and absolutely must continue with energy.