So the recent political agreement on an implementation period is welcome. There was always going to be an interlude between political agreement and legal certainty. So authorities here have done what our mandate to keep the system capable to serving the economy implies. Regulatory underpinning has been given to the political agreement. European firms can assume they’ll be able to operate in – and serve clients in – the UK, much as they do now, until the end of 2020. 5  5  See update on the regulatory approach to preparations for EU withdrawal, 28 March 2018, at https://www.bankofengland.co.uk/news/2018/march/update-on-the-regulatory-approach-to-preparations-for-eu-withdrawal 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  And that commitment is backstopped. The UK government has committed to legislate, if necessary, to allow European firms to operate and serve end users in the UK temporarily after Brexit. The economy of the UK, at least, can be confident that – whatever happens – it can access financial services as it does now. But still more action is needed because existing contracts could be disrupted. Uncleared over-the-counter derivative contracts, with a notional value of £ trillion, could be affected. That’s around a quarter of derivative contracts entered into by parties in both the UK and EU. Novation of contracts on that scale risks disruption, particularly if it were to take place in a short time frame. As with the flow of new services, a backstop would have benefit. It would need two parts.
In the realm of monetary policy, the conventional wisdom before the crisis, based on the long-standing success of former Fed Chairman Alan Greenspan, was that monetary policy should stay away from direct financial stability responsibility, particularly the management of asset price bubbles, and let the financial markets take care of themselves. And if things go wrong, policymakers can always clean up the mess after a bubble has burst by cutting interest rate aggressively. As we all know, the severity and the costs of this global financial crisis have very much discredited the so-called Greenspan Doctrine. Talk of risks to financial stability has now been mentioned frequently in several central banks’ monetary policy statements. Equally important, signs of financial imbalances have become parts of a watch list for many central banks. These developments stood in sharp contrast to the pre-crisis orthodoxy where financial stability would factor into monetary policy decisions only to the extent that it affected growth and inflation. The changing consensus on monetary policy does not mean that central banks will be using interest rates aggressively to fight off asset price misalignments and financial imbalances, however. By all means, interest rate policy is probably too blunt to be a “corrective” tool for financial stability given that, to materially impact asset prices, a substantial increase in the interest rate is required. Using the policy interest rate to actively steer asset prices would therefore have adverse consequences on the economy as a whole.