Q.WHAT IS THE FINANCIAL POLICY COMMITTEE (FPC)?
A.The Financial Policy Committee is one of three bodies the coalition government is creating to replace the Financial Services Authority (FSA) and the tripartite regulatory system. The new system will be introduced in 2013, when the FPC will sit inside the Bank of England, opposite the Monetary Policy Committee. It will be in charge of crafting macro-economic policy to prevent another financial crisis by monitoring systemic risk, including problems to do with market transparency, illiquidity, contagion, information problems and misaligned incentives.
Q.WHAT OTHER COMMITTEES WILL REPLACE THE FSA?
A.The FSA’s other responsibilities will be divvied up between the Prudential Regulatory Authority (PRA), to be led by FSA chief executive Hector Sants, and the Financial Conduct Authority. The first will look at the soundness of individual financial institutions, while the latter will play a policing role in prosecuting misdeeds and will supervise capital markets and the UK Listing Authority.
Q.WHAT WILL THE INTERIM FINANCIAL POLICY COMMITTEE’S ROLE BE?
A.The members announced yesterday will join an interim FPC, which will pave the way for the establishment of a permanent version of itself in 2013, whose board will be recruited in the same way as the MPC’s members. As well as monitoring systemic risk, the interim FPC will determine what kind of tools the task requires and will review and approve a new publication required of the Bank of England: a biannual Financial Stability Report.
Q.WHAT ARE THE NEW INTERIM FPC MEMBERS GOING TO DO?
A.They are meant to add an outsider perspective to an interim FPC otherwise staffed wholly by regulators. However, only one (Michael Cohrs) has business experience. The other three are all economists or former regulators.
Q.HOW WILL THE NEW FPC HELP TO PREVENT A NEW CRASH?
A.Many observers are sceptical that it can actually prevent another crash. The new model gives a raft of new powers to the Bank of England, whose MPC has a dubious record when it comes to spotting and defusing credit bubbles. In addition, the FPC will be required to take into account the impact of its measures on economic growth, which could effectively prevent it from halting excessive credit growth.