UK: What is the principal role of the board?

An answer can be found, alongside further reflections on governance including the role of non-executive directors, in a speech delivered by Martin Taylor (an external member of the Financial Policy Committee) earlier this month: see here (pdf). Here is an extract:

At the heart of the private sector board is a contradiction which amounts to a glaring structural weakness.  The directors are supposed both to contribute to the formation of the company’s strategy and to judge those who execute it. As a result, their relation to executive management is at once collaborative and adversarial.  Most of what goes wrong on boards arises from a failure to balance these opposing requirements – often an understandable failure, since they do not sit easily side by side.  Boards have the power of appointing and removing the business leadership, a power which they seem to exercise very frequently, as if afraid it might be taken from them, rather as ramblers zealously hack their way through brambles to preserve Rights of Way.  My own view formed over many decades is that the corporate board should principally play a defensive role; it exists above all to prevent catastrophic outcomes. Good governance, and there is plenty of it, passes largely unnoticed, while a board in the wake of a company failure looks like a collection of idiots. In the financial sector, with which the FPC is principally concerned, it is inescapably clear that most boards in the early part of this century did an absolutely shocking job".

UK: The Bank of England Act 1998 (Macro-prudential Measures) Order 2016

The Bank of England Act 1998 (Macro-prudential Measures) Order 2016 was made last week: see here (pdf). An explanatory memorandum is available here (pdf). The Order confers on the Financial Policy Committee the power to give directions to the Prudential Regulation Authority and Financial Conduct Authority to take action concerning loan-to-value ratios and interest coverage ratios for buy-to-let mortgages.

UK: FPC publishes financial stability report - risks begin to crystalise

The Financial Policy Committee published its first financial stability report for 2016 today: see here (pdf). An executive summary is available here (pdf). The outlook for financial stability is challenging following the referendum on EU membership, and the FPC concludes that some risks have begun to crystalise. It has recommended to the Prudential Regulation Authority that the UK countercyclical capital buffer rate is reduced from 0.5% to 0%.

UK: Treasury Committee inquiry into bank capital standards

In an announcement last Friday, the chairman of the House of Commons Treasury Committee, the Rt Hon Andrew Tyrie MP, announced that the Committee would soon begin an inquiry into bank capital standards: see here. This follows the Committee's publication of a letter (here, pdf), from the Governor of the Bank of England to the Committee, concerning the disagreement between Sir John Vickers (chairman of the Independent Commission on Banking) and the Financial Policy Committee over the implementation of the systemic risk buffer.

UK: HM Treasury consultation - FPC powers of direction and the buy to let market

HM Treasury is consulting on the tools the Financial Policy Committee should have in respect of its powers of direction and the UK buy to let market: see here. The consultation paper is accompanied by draft legislation - The Bank of England Act 1998 (Macro-prudential Measures) Order 2016, available here (pdf) - and an impact assessment (here, pdf).

UK: Financial Policy Committee - financial stability report published - cyber risk and capital buffers

The Financial Policy Committee has published its second Financial Stability Report for 2015 (two reports are published in each calendar year): see here. An executive summary is available here (pdf). The FPC is maintaining the UK countercyclical capital buffer rate at 0% for the time being, but nevertheless states that it is "actively considering the appropriate setting" of the buffer; a review is planned for March 2016 and an increase seems likely. The FPC also notes that cyber risk continues to pose a threat to the financial system.

UK: Financial Policy Committee - remit and recommendations for the year ahead

Last month, the Chancellor set out, as required by the Bank of England Act 1998 (as amended by the Financial Services Act 2012), the remit and recommendations for the Financial Policy Committee for the year ahead: see here (pdf). The FPC published its response yesterday: see here (pdf). The FPC's response explained, amongst other things, the focus on potential risks from non-bank activities (noting that, by balance sheet size, nearly half of the UK financial system consists of non-bank financial institutions).

UK: Bank of England Bill - consultation paper published

HM Treasury yesterday published a consultation paper in respect of the new Bank of England Bill: see here (pdf). The paper seeks views on various proposals, the purpose of which, to quote from the paper, will be to "further strengthen the Bank’s governance, transparency and accountability, enhance the ability of the Bank to discharge its macroprudential, micro-prudential, and monetary policy responsibilities in a coordinated way, and ensure that the UK’s crisis management arrangements keep pace with developments in resolution policy" (para. 1.7).

UK: PRA consults on implementation of leverage ratio framework

Last month the Financial Policy Committee issued a direction and recommendation to the Prudential Regulation Authority concerning the leverage ratio framework for major UK banks and building societies: see here (pdf). The PRA is now consulting on how it will implement the UK's leverage ratio framework: see here (pdf). Further background information is available here.

UK: Financial Policy Committee - recommendations from the Chancellor

One of the amendments made to the Bank of England Act 1998 by the Financial Services Act 2012 was to require the Chancellor, on an annual basis, to provide recommendations to the Financial Policy Committee in respect of the financial stability objective given to the Bank of England. The Chancellor did this earlier this week: see here (pdf).

UK: Transparency and accountability at the Bank of England

The Bank of England today announced various changes to its operations and structure designed to improve transparency and accountability: see here. Some of these changes implement the recommendations of the Warsh Review, also published today: see here. Changes have also been announced concerning the governance of the Bank and its Committees.

For further information, see: The Warsh Review (pdf) | The Bank's proposals (pdf) | Comments from the Governor of the Bank (pdf) | Press conference video recording.

UK: FPC review of the leverage ratio

The Financial Policy Committee published the results of its review of the leverage ratio today: see here (pdf). In its document, the FPC sets out the power it would like HM Treasury to grant it: the power to direct the Prudential Regulation Authority to set leverage ratio requirements and buffers for PRA-regulated banks, building societies and investment firms, including: a minimum leverage ratio requirement; a supplementary leverage ratio buffer that will apply to G-SIBs and other major domestic UK banks and building societies, including ring-fenced banks; and a countercyclical leverage ratio buffer.

The document explains the FPC's intentions in respect of this new power of direction. For example, the minimum leverage ratio requirement would be set at 3%.

Publication of the review was accompanied by an exchange of letters between the Governor of the Bank of England and the Chancellor of the Exchequer: see here (pdf) and here (pdf).

UK: HM Treasury consultation on the FPC's power of direction - mortgage lending and LTV and DTI limits

A consultation paper was published today by HM Treasury setting out the intention (with supporting draft legislation) for the Financial Policy Committee to be given the power to direct the Prudential Regulation Authority and Financial Conduct Authority to restrict institutions' mortgage lending with reference to loan-to-value and debt-to-income limits: see here (pdf). This would apply to owner occupied mortgages; the extent to which such limits should apply to buy-to-let mortgages will be the subject of a separate consultation next year.

UK: FPC seeks additional powers of direction in respect of residential lending

The Financial Policy Committee is seeking additional powers which would enable it to direct the Prudential Regulation Authority and Financial Conduct Authority to place limits on residential mortgage lending by regulated lenders, with reference to loan to value ratios and debit to income ratios. Further information is available in a statement published by the FPC setting out the rationale for seeking this new power: see here (pdf).

UK: PRA consults on implementing the FPC recommendation on loan to income ratios in mortgage lending

The Prudential Regulation Authority published a consultation paper yesterday setting out how it proposes to respond to the recommendation made by the Financial Policy Committee that mortgage lenders limit the number of mortgage loans made at or greater than 4.5 times LTI to no more than 15% of their overall number of mortgage loans: see here (pdf).

UK: Bank of England publishes stress testing framework discussion paper

The Bank of England has published a discussion paper titled A framework for stress testing the UK banking system: see here (pdf). The paper sets out the main features of the Bank's proposed stress-testing framework, the purpose of which is provide a quantitative, forward-looking assessment of the capital adequacy of the UK banking system and individual institutions within it.

FSB publishes peer assessment of the United Kingdom

The Financial Stability Board has published its peer review assessment of the United Kingdom: see here (pdf). Various recommendations are made. The FSB states, for example, that the Financial Policy Committee should develop its relationship with the Financial Conduct Authority by increasing the latter’s involvement in FPC meeting preparations and by jointly undertaking systemic risk analysis work.

UK: FPC publishes financial stability report

The Financial Policy Committee has published its first financial stability report under the new financial regulatory framework that came into existence earlier this year: see here. An executive summary, containing the recommendations that the FPC has made to the Prudential Regulation Authority and Financial Conduct Authority, is available here (pdf). Amongst other things, the FPC has requested that the PRA and FCA provide, by September 2013,
an assessment of the vulnerability of borrowers and financial institutions to sharp upward movements in long-term interest rates and credit spreads in the current low interest rate environment. The PRA has also been asked to continue working with banks and building societies to ensure the greater consistency and comparability of their Pillar 3 disclosures, including reconciliation of accounting and regulatory measures of capital.

UK: financial stability and foreign bank branches

Last Friday the Bank of England published Financial Stability Paper No. 22 - Which way do foreign branches sway? Evidence from the recent UK domestic credit cycle: see here (pdf). The report notes that lending to the UK economy by foreign branches has been more volatile than by UK-incorporated banks, UK-owned banks and foreign subsidiaries. Close monitoring of the risks posed by foreign branches with respect to financial stability is recommended, as is the need for the Bank of England’s Financial Policy Committee to monitor closely the growth in domestic lending not only in aggregate but also by different types of banks and to different sectors of the economy.

UK: Treasury Select Committee begins new inquiry - appointment and conduct of FPC, MPC and Court members

The House of Commons Treasury Select Committee has begun an inquiry considering the rules governing the appointment and conduct of members of the Bank of England’s Financial Policy Committee, Monetary Policy Committee and Court, as well as the independence of the Financial Policy Committee: see here.