These ratios are many times what they were prior to the crisis (Chart 1). Recognising the feedback mechanisms that so  Sources: PRA regulatory returns, published accounts and Bank calculations. Note: Refers to major UK banks. For detailed definitions see notes to Chart B.1 in the November 2017 Financial Stability Report. amplified the severity of the crisis, there were also reforms designed to ensure the stability of the financial 3 4  Bean (2010) and Svensson (2015). Tucker (2011). 3  All speeches are available online at www.bankofengland.co.uk/speeches  3  system as a whole. Extra capital is now required for institutions judged to be systemically important. Trading in many derivatives has been shifted to central clearing houses, and the associated collateral requirements tightened. And in several countries new authorities have been created to identify and mitigate system-wide risks, using what is known as “macro-prudential” policy. In the UK, macro-prudential policy is conducted by the Financial Policy Committee (FPC), housed within the Bank of England. Mirroring the set-up for the Bank’s Monetary Policy Committee (MPC), the FPC’s remit is set by the UK government but it is operationally independent of the executive and accountable directly to parliament. There are many instruments that might fall under the heading of macro-prudential policy, some of which – quantitative restrictions on lending, for example – have, in one form or another, been around for a long time (Elliot et al. (2013), Goodhart (2015)). Others, such as the counter-cyclical capital buffer, are newer.
Armed with the whole array of price and quantity indicators of 12  The observer updates her distribution over the probability using Bayes’ law. Chart 9 is the mean of that updated distribution as a function of the number of years of data that the agent has observed. 12  All speeches are available online at www.bankofengland.co.uk/speeches  12  risk we – and others – can make informed judgements about the right level of loss-absorbing capital in the banking system and about the appropriateness of more targeted policy tools. And if it takes time to demonstrate decisively a reduction in system-wide risk, there are some policies whose effects are more immediately obvious. In 2014, responding to concerns about growth in riskier mortgages, the FPC introduced limits on the share of banks’ mortgage lending at high (>4.5) loan-to-income ratios. Recently, the committee noted that there’s since been quite a bit of “bunching” in new loans just below this limit. I’m not so sure this is a problem: for my part I see it mainly as clear and timely evidence that the policy has had an impact. The point remains, however, that the FPC’s objective is inevitably less precise, and its success less immediately measurable, than that of the MPC. Recalling the results of the analysis I discussed at the start of the talk, on the appropriate allocation of tasks, this suggests that there might well be a cost if you asked a single body – an “FMPC” – to meet all these objectives at once.