Chancellor of the Exchequer George Osborne told the Bank of England that its financial-stability policies should take into account the weakness of the economy and refrain from curbing the recovery.
Setting the Financial Policy Committee’s first remit, Osborne said the central bank must acknowledge the economic cycle when setting policy. He also said there is a need for “clear” communications to win the confidence of financial markets and called for a list of risks by the end of the year.
“Even if individual firms are believed to be sound, when their activities are considered in aggregate, risks to the whole system can emerge,” Osborne said in a statement released by his office in London today. “The Financial Policy Committee is now charged with identifying, monitoring and addressing risks to the financial system as a whole.”
Osborne shut the previous financial regulator and gave most of its powers to the BOE to overhaul regulation which, he says, failed in part because the structure wasn’t adequate. Under the new Financial Services Act, Osborne has the power to set the FPC’s objectives and how it should operate in order to support the government’s economic policies.
The remit “‘recognizes that there may be short-term trade offs between the committee’s second objective of contributing toward sustaining economic growth and its primary objective of addressing sources of systemic risk, which may vary at different points in the economic and credit cycle,” Osborne said. “It is particularly important at this stage of the cycle that the committee takes into account, and gives due weight to, the impact of its action on the near-term economic recovery.”
In the document outlining the remit and recommendations to the FPC, the Treasury noted that a “key element” of the government’s economic strategy is to minimize risks to taxpayer funds and reduce the “perceived implicit taxpayer guarantee.”
It said the panel must “have regard to whether there is a material risk of public funds being required, such that the bank’s obligation to notify the Treasury would be triggered.”
The decisions of the FPC, unlike the bank’s Monetary Policy Committee, are to be achieved by consensus whenever possible, and disagreement will be reflected in the record of the meeting. Today’s statement called on officials to coordinate their communication and “attach high priority” to “reducing uncertainty and boosting confidence in financial markets.”
The panel should publish the indicators it will use to monitor financial stability risks, give “clear, focused and consistent messages about the planned regulatory response” and ensure “that its policy actions are as predictable as possible.”