Following the financial crisis, the model for prudential regulation in the UK has been further developed by the establishment of the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA). The mandates for both the FPC and PRA are set out in primary legislation: the FPC is responsible for protecting and enhancing the overall stability of the UK financial system; and the PRA’s primary objectives are to promote the safety and soundness of regulated firms and to contribute to the securing of an appropriate degree of protection for policyholders. But importantly, the mandates for the FPC and PRA ensure that other factors such as long-term productivity and economic growth are taken into account when setting policy. The FPC must pursue its financial stability objective without causing serious harm to the wider economy in the medium or I would like to thank Matthew Willison, Hugh Burns, Nicolo Fraccaroli and David Swallow for their assistance in preparing these remarks 6  long term. In other words, the FPC must avoid the ‘stability of the graveyard’. 6 And, the FPC also has a secondary objective, subject to its pursuit of its primary objective: that of supporting the economic policy of the government. The PRA also has an important secondary objective to facilitate effective competition, and must have regard to a set of regulatory principles, including the desirability of sustainable economic growth.
Chart 1: Regulatory-Supervisory Independence and central bank independence, 1999-2019 (a)  (a) The data on central bank independence is drawn from Bodea and Hicks (2015) and Garriga (2016). Weighted versions of the indices are used to aid comparison. The weighting is based on Cukierman et al (1992). The second step in the analysis was to examine whether there is an association between the Regulatory-Supervisory Independence index and financial stability. Defining an ex ante quantitative indicator of the success or otherwise of prudential regulation is hard, unlike with monetary policy where such measures are easier to arrive at. But fortunately, this is less of a problem for this analysis because we have ex post observations of distress in the banking system. The authors used rates of non-performing loans at banks as a measure of financial (in)stability.9  They analyse whether reforms that increased regulatory-supervisory independence were associated with subsequent a reduction in the rates of non-performing loans. Panel data regression show a 9  That is, non-performing loans as a proportion of total gross loans. I would like to thank Matthew Willison, Hugh Burns, Nicolo Fraccaroli and David Swallow for their assistance in preparing these remarks 9  negative and statistically significant association between independence-increasing reforms and rates of non-performing loans – see Table 3.