## _cr16160

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### Institutional framework: design and functioning
- The U.K. overhauled its financial regulatory structure emphasizing financial stability and created a new institutional framework intended for effective macroprudential policy.
- Key design features:
  - Clear roles and responsibilities, adequate powers and accountability, and strong coordination between constituent agencies.
  - The Financial Policy Committee (FPC) at the Bank of England (BoE) sits at the center of the macroprudential framework, tasked with identifying, monitoring and taking action to mitigate systemic risk.
  - The FPC can make recommendations to the Treasury on the perimeter of regulation and the macroprudential toolkit, and on a comply-or-explain basis to microprudential regulators (the PRA and the FCA).
  - The FPC has powers of direction over specific macroprudential tools prescribed by the Treasury (and approved by Parliament).
  - Information collection powers and data-sharing provisions are described as adequate.
- Composition and independence safeguards:
  - FPC membership: five BoE members (Governor, three Deputy Governors—including the head of the PRA—and the Executive Director for the analysis of threats to financial stability), the head of the FCA, four external members chosen by the Chancellor from outside the bank, and a non-voting member from Treasury.
  - Legislation and the FPC Code of Conduct include requirements on personal independence of external members; appointments are subject to public appointment scrutiny by the Treasury Select Committee.

### Operational framework: progress, process, and monitoring
- Process established:
  - Risk assessment is a regular quarterly surveillance process using a broad range of indicators, market intelligence, supervisory insights and analysis by BoE staff (including PRA and FCA).
  - A typical quarterly cycle has four stages: (i) briefings on financial developments and financial stability risks; (ii) FPC issues meetings; (iii) FPC policy-making meetings; (iv) communication of risk assessments and policy decisions.
  - An annually dedicated discussion on the regulatory perimeter has been established; dedicated perimeter discussions held in June 2014 and June 2015.
- Staff and inputs:
  - A dedicated FPC secretariat coordinates inputs and supports outputs.
  - A dedicated financial stability directorate is organized by sources of risk: real economy, banks, and markets and nonbank financial institutions.
  - The FPC and the PRA Board receive a joint Quarterly Risk Pack which feeds the Financial Stability Report (FSR).
- Indicators and analytics:
  - Authorities analyze a broad range of indicators; a subset of “core indicators” is publicly available in each FSR.
  - Core indicators are organized around tools to guide the use of direction powers; authorities may consider organizing core indicators around types of “risk” and “resilience.”
  - Qualitative information and analytical exercises supplement indicators, including an annual concurrent stress testing exercise and market intelligence.
- Data progress and gaps:
  - Progress: significant progress on bank interconnectedness, regulated mortgage lending and derivatives and securities markets; EMIR transaction-level derivatives data and G20 Data Gaps Initiative contributed.
  - Remaining material gaps: U.K. flow of funds coverage (notably securities holdings), activities of nonbank financial institutions, and buy-to-let mortgage market coverage (mortgage features such as loan-to-value and interest-coverage ratios are patchy).
  - Strategy: joint BoE/ONS work to improve flow of funds statistics; joint BoE/FCA work on nonbank financial institutions; BoE in-house collection and joint work with the Council of Mortgage Lenders on buy-to-let.

### Toolkit, policy approach, and specific instruments
- Policy approach: “guided discretion” — FPC publishes Policy Statements explaining intended use of direction powers while retaining judgment based on a set of core indicators, supervisory and market intelligence, and stress testing results.
- Direction powers focus mainly on risks from excessive leverage and credit growth; for liquidity and structural risks FPC relies mainly on recommendation powers.
- Tools under direction or in use (as described):
  - Countercyclical capital buffer (CCB) under Basel III.
  - Sectoral capital requirements (SCR).
  - Loan-to-value ratios (LTV) and debt-to-income ratios (DTI) on owner-occupied mortgage lending.
  - Leverage ratio, including a countercyclical leverage ratio buffer and a leverage surcharge for systemically important institutions.
  - LTV/DTI design allows two parameters: ratio threshold and proportion of new mortgages lenders may extend above that threshold.
- Implementation status and pending items:
  - Some tools remain to be implemented; FPC requested direction powers for buy-to-let lending tools (under government consultation).
  - Planned or scheduled implementations listed: NSFR (2018); leverage ratio for non-G-SIBs (2018); SRB for ring-fenced banks (2019); leverage surcharge for ring-fenced banks (2019); higher-loss absorbency requirements for global systemic insurers (2019).

### Willingness and ability to act; accountability and transparency
- Statutory mandate:
  - BoE statutory objective: originally “to contribute to protect and enhance financial stability” (Banking Act of 2009), strengthened to “to protect and enhance financial stability” by the Financial Services Act of 2012.
  - FPC functions: identify, monitor, and take action to mitigate systemic risk to the U.K. financial system or significant parts of it; must take account of policy trade-offs and has a secondary objective to support the economic policy of the Government.
  - FPC is required, when practicable, to accompany decisions with a cost-benefit analysis.
- Decision-making rules:
  - Chair must seek consensus where possible; if consensus cannot be reached, a simple majority voting arrangement applies.
  - In practice all decisions to date have been unanimous; the FPC emphasized seeking consensus but will be flexible (e.g., CCB calibration).
- Communication and publication requirements:
  - FPC meeting records must specify any decisions taken, including decisions to take no action, and must set out a summary of deliberations; records must be published no later than six weeks after the meeting (publication can be deferred if against the public interest).
  - FPC must publish a Financial Stability Report (FSR) twice every year; FSR must include FPC’s view of stability, assessment of developments, strengths and weaknesses, risks, outlook, and progress against previous Recommendations and Directions.
  - For tools under direction powers, FPC must publish a policy statement covering tool description, likely impact on financial stability and growth, and circumstances for use; core indicators are identified for each tool.
- Accountability bodies and practices:
  - The BoE is accountable to the general public and Parliament through the Treasury Select Committee.
  - Treasury Select Committee: regular hearings (including FSR hearings twice a year), appointment hearings, and topical inquiries; has influenced policy design and governance (examples cited).
  - Oversight Committee: sub-committee of the BoE Court of Directors (non-executive members) with privileged access to FPC briefing material; up to two members may sit as observers at FPC meetings.
  - The Independent Evaluation Office: established in 2014 to support the Oversight Committee and Court, undertaking one-off assessments and facilitating external reviews.
- Public outreach and awareness:
  - FPC members make a combined total of approximately 15 FPC-related speeches per year.
  - Additional outreach: press interviews, panel discussions, op-eds, regional visits, Quarterly Bulletin articles, working papers, Bank Underground blog-posts.
  - Public awareness remains low relative to the MPC: survey cited at Spencer Dale’s appointment hearing (April 30th 2014) showed only 11 percent had heard about the FPC (of which at least one third had a wrong impression).

### Experience to date and institutional risks
- Activity and early functioning:
  - Since the interim FPC began operating, a total of 42 recommendations or directions have been issued (this number excludes the decision to keep the CCB rate at zero percent).
  - The U.K. ranked among the most active users of macroprudential policies in the EU during 2014 (ESRB review).
  - The “One Bank” strategy aims to promote increased connectivity within the BoE; planned joint exercises with FCA staff target risks beyond the core financial sector.
- Risks and challenges:
  - Effectiveness depends on maintaining a strong focus on financial stability in one of the world’s largest financial centers.
  - Potential pressures: fading memories of the last crisis could intensify external pressures for inaction; BoE resources on FPC issues could be squeezed by competing demands from other policy functions.
  - Concern over potential “groupthink” from concentration of powers in the BoE; mitigants include external FPC members, Parliamentary oversight, and the Oversight Committee.
  - Recommendation: FPC should persist in communicating its mission and methods widely and promote public understanding of its policy reaction function.

### Legislative channels, Treasury dialogue, and safeguards
- Treasury interaction:
  - A Treasury representative sits at the FPC as a non-voting member; the line between dialogue and undue interference must be monitored by accountability mechanisms.
  - Legislation allows the Treasury to make recommendations to the FPC on how to interpret its mandate; the FPC must respond but may disagree and not act accordingly.
  - The Treasury is required to specify its economic policy which the FPC shall take into account as part of its secondary objective.
  - “Remit letters” from the Chancellor are distinct from MPC remit letters; referring to them as “recommendation letters” could make this distinction clearer.
- Decision documentation:
  - Meeting records are to reflect summaries of deliberations; where votes occur individual members’ votes are to be reflected in records and members may explain differences publicly.

### Domestic coordination and cooperation
- Formal coordination mechanisms:
  - Information sharing responsibilities, overlapping memberships, references to financial stability in microprudential mandates, and the FPC’s duty to have regard to microprudential objectives.
  - FCA and PRA chief executives are both members of each other’s Boards and of the FPC; the BoE Governor chairs the FPC, the MPC, and the PRA Board.
- Examples of coordination in practice:
  - Forward guidance “knock-out”: MPC provided the FPC a knock-out power so guidance would cease if FPC judged monetary policy posed a significant threat to financial stability.
  - Stress testing: Since 2014 BoE stress-testing is conducted jointly by the FPC and the PRA Board.
  - Housing measures (2014): coordinated actions — FCA required lenders to apply a stressed affordability test; PRA limited high loan-to-income ratio loans by banks and building societies.

### Evolving engagement beyond banking and international cooperation
- FPC engagement with FCA and broader systemic focus:
  - Initial focus was on banking and closer engagement with PRA; as focus broadened, interactions with FCA staff have strengthened; joint working groups exist on asset management, market liquidity, hedge funds and cyber risks; deep dives cover systemic relevance of sectors.
- International engagement:
  - FPC/BoE active in FSB and ESRB; BoE Governor is acting head of the FSB and vice-head of the ESRB.
  - Legislation allows the BoE to disclose information to foreign authorities with similar functions.
  - FCA maintains “gateways” to share confidential supervisory information with other regulators.
- Reciprocity, cross-border leakages, and CCB:
  - EU legislation sets a formal coordination arrangement for the CCB starting in 2016 (mandatory within a certain range and voluntary otherwise).
  - The FPC has reciprocated foreign CCB rates ahead of schedule (Norway, Sweden and Hong Kong).
  - Reciprocity for tools other than the CCB largely operates on a voluntary basis and remains mostly untested.
  - Recommendation: authorities should keep developments under review and assess the need for additional bilateral agreements or stronger regional agreements.
- Host authority control vs. market access:
  - Within the EEA, legal constraints limit stronger host control; for non-EEA branches PRA authorization focuses on home state supervision quality and activities in the U.K.
  - Foreign branches account for roughly one third of banking sector assets in the U.K., two thirds of which correspond to non-EEA branches.
  - If necessary, non-EEA banks performing critical functions in the U.K. could be required to set up a U.K. subsidiary.

### Oversight, reviews, and governance safeguards
- Oversight Committee:
  - Privileged access to FPC materials; acts as internal cross-check and disciplining device; may appoint external experts for retrospective performance reviews; reports in the BoE Annual Report.
  - Performance reviews to date have been mostly descriptive; no external performance review centered on macroprudential policies/processes has been commissioned.
- Independent Evaluation Office:
  - Established in 2014 to support Court and Oversight Committee; conducts one-off assessments and facilitates external reviews.
- Tradeoffs of power concentration:
  - Concentration within BoE favors coordination but raises risks of groupthink; safeguards include external FPC members, parliamentary and Oversight Committee scrutiny, and the Treasury’s ability to make recommendations.

### Core indicators and sector coverage (Appendix III summary)
- Household sector core indicators (selected):
  - Household mortgage loan growth rate; Household credit growth; Share of household mortgage loans to total credit; House price growth; House price-to-disposable income ratio; LTV ratio; LTV ratio on new residential mortgages; DSTI ratio; LTI ratio; Household debt to income ratio; Mortgage approvals; Spreads on new residential mortgage lending.
- Corporate sector indicators (selected) and mapping to tools:
  - PNFC credit growth — CCB; CRE credit growth — SCR; PNFC debt to profit ratio — SCR; Spreads on new UK corporate lending — CCB.
- Liquidity indicators (selected):
  - Loan-to-deposits ratio; Noncore-to-core funding ratio; Short-term wholesale funding ratio; Liquid asset ratio (e.g. Basel III LCR); Maturity mismatch indicators (e.g. Basel III NSFR); Securities issuance; Short-term capital inflows.

### U.K. Macroprudential Toolkit (Appendix IV summary: legal basis, decision, perimeter, reciprocity, timing)
- Sectoral capital buffer (residential/commercial mortgage and intra-financial exposures)
  - Legal basis: Pillar 1 or 2 CRD, or Art. 458 CRR
  - Decision: FPC PoD
  - Implementation: PRA
  - Perimeter: UK incorporated "CRD institutions"
  - Reciprocity: Voluntary
  - Timing/introduced: 2013
- Countercyclical capital buffer
  - Legal basis: Art. 130, 135-140 CRD
  - Decision: FPC
  - Implementation: PRA/FCA
  - Perimeter: UK incorporated "CRD institutions"
  - Reciprocity: EEA: mandatory up to 2.5% ; Other countries: voluntary
  - Timing/introduced: 2014
- LTV/DTI limits (owner-occupied)
  - Legal basis: National Law
  - Decision: FPC PoD
  - Implementation: PRA/FCA
  - Perimeter: All PRA- and FCA-authorised firms conducting owner-occupied lending*
  - Reciprocity: Voluntary
  - Timing/introduced: 2015
- Leverage ratio
  - Legal basis: National Law
  - Decision: FPC PoD
  - Implementation: PRA
  - Perimeter and timing: Introduced 2015 (systemic) / 2018 (rest); extended to all UK banks, building societies, and PRA-regulated investment firms from 2018
  - Reciprocity: Voluntary minimum
- Systemic buffers and other items (selected timing/coverage):
  - Systemic buffer (domestic) timing/introduced: 2019 (perimeter: ring-fenced banks and large building societies)
  - G-SIB capital surcharge phase-in: 2016-2019 (four U.K. headquartered banks included in initial list)
  - NSFR introduce minimum standard: 2018
  - HLA for global systemic insurers timing/introduced: 2019
- Notes:
  - "CRD institutions" include banks, building societies and investment firms regulated by PRA or FCA.
  - When implemented through prudential requirements LTV/DTI measures include mortgage lending by overseas lenders' U.K. subsidiaries and branches regulated by the PRA, but exclude EEA branches unless reciprocated by relevant foreign authorities.
  - The FPC’s power to set the UK countercyclical capital buffer is established through European law rather than the UK legislation governing FPC’s powers of direction.

*IMF staff summary of content in document _cr16160.*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Institutional framework: design and functioning
- The U.K. implemented an overhaul of its financial regulatory structure emphasizing financial stability and creating a new institutional framework intended for effective macroprudential policy.
- Key design features:
  - Clear roles and responsibilities, adequate powers and accountability, and strong coordination between constituent agencies.
  - The Financial Policy Committee (FPC) at the Bank of England (BoE) sits at the center of the macroprudential framework, tasked with identifying, monitoring and taking action to mitigate systemic risk.
  - The FPC can make recommendations to the Treasury on the perimeter of regulation and the macroprudential toolkit, and on a comply-or-explain basis to microprudential regulators (the PRA and the FCA).
  - The FPC has powers of direction over specific macroprudential tools prescribed by the Treasury (and approved by Parliament).
  - Information collection powers and data-sharing provisions are described as adequate.
- Coordination and multilateral engagement:
  - Formal mechanisms foster coordination and cooperation across agencies; heads of microprudential regulators are FPC members and mandates are aligned with the BoE’s financial stability objective.
  - Authorities have been active in international organizations (for example, the Financial Stability Board (FSB) and the European Systemic Risk Board (ESRB)).
  - EU legislation (applicable in the U.K. at the time of the Note) sets out formal coordination arrangements for the countercyclical capital buffer (CCB) starting in 2016; the FPC has recognized foreign CCB rates ahead of schedule.
  - Reciprocity for tools other than the CCB largely operates on a voluntary basis; the FPC intends to reciprocate foreign macroprudential capital actions where appropriate. The effectiveness of reciprocity arrangements remains mostly untested and needs review.

### Operational framework: progress and remaining work
- The FPC has established a functional process for identifying systemic risk and mapping risks into policy action:
  - Risk assessment is a regular quarterly surveillance process using a broad range of indicators, market intelligence, supervisory insights and analysis by BoE staff (including PRA and FCA).
  - An annually dedicated discussion on the regulatory perimeter has been established.
  - Work is underway to develop better monitoring of risks beyond the core financial sector; progress has been made and initiatives are ongoing to address data gaps.
- Toolkit and policy approach:
  - Direction powers exist over tools that mainly target risks from excessive leverage and credit growth (including tools beyond Basel III).
  - The policy for use of macroprudential tools is described as “guided discretion”: the FPC publishes Policy Statements explaining intended use while retaining discretion.
  - For managing liquidity and structural risks, the FPC mainly relies on broad recommendation powers.
  - The macroprudential toolkit is still evolving; certain tools are yet to be implemented. The FPC has requested direction powers for tools covering buy-to-let lending (under consultation by the Treasury) and will reassess needs as risks evolve and international standards develop.
- Specific tools referenced:
  - The countercyclical capital buffer (CCB) under Basel III.
  - Sectoral capital requirements.
  - Loan-to-value ratios (LTV) and debt-to-income ratios (DTI) on owner-occupied mortgage lending.
  - The leverage ratio, including a countercyclical leverage ratio buffer and a leverage surcharge for systemically important institutions.

### Willingness and ability to act; accountability
- Willingness to act:
  - The BoE has a clear financial stability mandate established by legislation: statutory objective “to contribute to protect and enhance financial stability” (Banking Act of 2009) strengthened to “to protect and enhance financial stability” by the Financial Services Act of 2012.
  - The FPC’s functions: identify, monitor, and take action to mitigate systemic risk to the U.K. financial system or significant parts of it, including structural features, distribution of risk, and unsustainable leverage, debt or credit growth.
  - The FPC must take account of policy trade-offs, has a secondary objective to support the economic policy of the Government, and is required, when practicable, to accompany decisions with a cost-benefit analysis.
- Composition and independence safeguards:
  - The FPC consists of five BoE members (Governor, three Deputy Governors—including the head of the PRA—and the Executive Director for the analysis of threats to financial stability), the head of the FCA, four external members chosen by the Chancellor from outside the bank, and a non-voting member from Treasury.
  - Legislation and the FPC Code of Conduct include requirements on personal independence of external members; appointments are subject to public appointment scrutiny by the Treasury Select Committee.
- Accountability:
  - The framework relies on required communication tools, inquiries by the Treasury Select Committee (Parliament), and reviews by the Oversight Committee (BoE).
  - Early oversight experience: the Treasury Select Committee and the Oversight Committee appear to provide appropriate oversight.

### Experience to date and institutional risks
- Early functioning:
  - The FPC has been active during its first years and the BoE recognizes interactions between its policy functions and the need for coordination.
  - The “One Bank” strategy is promoting increased connectivity within the BoE.
  - Planned joint exercises with FCA staff aim to look at risks beyond the core financial sector to further relationship-building and coordination.
- Risks and challenges going forward:
  - The effectiveness of the framework will depend on maintaining a strong focus on financial stability, which is challenging in one of the world’s largest financial centers.
  - Potential pressures:
    - Fading memories of the last crisis could intensify external pressures for inaction.
    - Within the BoE, resources on FPC issues could be squeezed by competing demands from other policy functions.
  - The Treasury Select Committee and the Oversight Committee are expected to monitor these risks.
  - The FPC should persist in communicating its mission and methods widely.

### Scope and limits of the Note
- The Note focuses on the institutional and operational frameworks for macroprudential policy and does not assess the appropriateness of specific macroprudential policy decisions.
- The Note does not take into account the BoE and Financial Services Bill in Parliament at the time of the mission; based on public documentation and discussions, the Bill (which later received Royal Assent and became an Act of Parliament in May 2016) was not expected to materially change the Note’s conclusions.
- Mentioned possible statutory changes (as proposed while the Bill was in Parliament) included:
  - Bringing the PRA within the Bank (ending its status as a subsidiary) and creating a Prudential Regulation Committee (PRC).
  - Adjusting the statutory basis of the FPC from a subcommittee of the Court to a committee of the Bank.
  - Adding the Deputy Governor for Markets and Banking as an ex-officio FPC member and a new external member to preserve balance.
  - Abolishing the Oversight Committee and transferring oversight functions to the BoE Court (which should retain an independent Chair and a majority of non-executive members).

_United Kingdom: IMF technical note executive summary (as provided in the source content)._

### 11.      The legislative framework provides channels to promote the dialogue and interaction

### _cr16160 - 11.      The legislative framework provides channels to promote the dialogue and interaction

### Legislative channels and safeguards for dialogue with the Treasury
- A Treasury representative sits at the FPC but does not hold voting rights.
  - In practice, the line between dialogue and undue interference could at times be hard to assess and therefore needs to be actively monitored by the framework’s accountability mechanisms.
  - In 2013, under public scrutiny, two FPC members had differing views on the role played by Treasury in the discussion on the capital needs for the two part state-owned banks; both members agreed that the interaction with Government had not had a material impact on the recommendation made by the FPC.
  - Public scrutiny mechanisms established in the framework play an important role so FPC members continue to act based on their own best judgment.
- Legislation allows Treasury to make recommendations to the FPC on how to interpret its mandate (responsibility of the Committee in relation to its objectives and matters it should have regard to when exercising its functions).
  - The FPC is required to respond to these recommendations, but is free to disagree and not act in accordance.
  - The Treasury is required to specify its economic policy, which the FPC shall take into account as part of its secondary objective, subject to its primary financial stability objective.
  - These letters are commonly referred to as “remit letters” but are not equivalent to the MPC’s remit letters; referring to the former as “recommendation letters” could help make this distinction more evident.

### FPC decision-making, consensus, and willingness to act
- Legislation requires the chair of the FPC to seek consensus wherever possible; if consensus cannot be reached, a simple majority voting arrangement is in place.
- A summary of the Committee’s deliberations is to be reflected in the meeting records.
- In practice:
  - FPC members have put a strong emphasis on seeking consensus and all decisions to date have been unanimous.
  - Seeking consensus should not be interpreted as a hard requirement, as this could risk paralyzing or delaying policies or making members compromise more than desirable.
  - When discussing the decision process for the calibration of the CCB, the FPC acknowledged that the discrete nature of the decision may not always lend itself to a consensus-based process and agreed to be flexible in its approach to setting the buffer.

### Mandate alignment of microprudential regulators
- The PRA’s general objective: promote the safety and soundness of the firms it regulates, focusing on the adverse effect they may have on financial stability.
- The FCA’s “integrity objective”: includes protecting and enhancing the soundness, stability and resilience of the U.K. financial system.
- Alignment implications:
  - Alignment of objectives can reduce conflicts, help foster engagement, and increase compliance with recommendations by ensuring powers assigned to these agencies can be used in the pursuit of financial stability.
  - Since implementation of the new regulatory framework, there has been a strong emphasis on enhancing the resilience of the financial system.
  - The alignment of mandates and the resolution of potential conflicts have yet to be tested.

### FPC activity and toolkit
- A total of 42 recommendations or directions have been issued since the interim FPC began operating.
  - Note: This number excludes the decision to keep the CCB rate at zero percent.
- The U.K. ranked among the most active users of macroprudential policies in the EU during 2014, according to a review conducted by ESRB (2015).
- Powers:
  - Legislation grants the FPC powers of recommendation and direction.
  - The FPC can make recommendations to any party, including the rest of the BoE and the Treasury.
  - For the PRA and the FCA, recommendations can be made on a comply-or-explain basis (regulators must comply as soon as is practical or explain publicly in writing why they have not done so).
  - The FPC has the power to direct the microprudential regulators to deploy specific macroprudential tools that are prescribed by the Treasury, and approved by parliament.
  - The set of tools under the direct control of the FPC is still evolving.
- Directions and recommendations to the PRA and FCA may apply to all or “types of” institutions (such as systemically important institutions).

### Information collection and ability to adapt perimeter
- The BoE may direct the microprudential regulators to provide information available to them or that they have the power to request.
- Each microprudential regulator has information collection powers from authorized entities for the purpose of their respective functions (which take into account financial stability).
- The PRA has a duty to collect information relevant to the stability of individual institutions or the U.K. financial system more broadly and has the “financial stability information power” to require additional information beyond PRA-authorized firms.
  - This includes managers of UK-related investment funds, service providers critical to authorized entities, and other entities critical for financial stability as prescribed by the Treasury.
  - To date, the authorities have not felt the need to exercise this power, relying on other alternatives instead.
- The FPC may issue recommendations, including requests for information, to other regulators and authorities as needed.
- Adaptation and perimeter recommendations:
  - The FPC may make recommendations to the Treasury pertaining to categories of firms outside the PRA’s scope from which it may collect information specifically for financial stability.
  - The FPC may recommend changes to the perimeter itself, including the division between regulated and unregulated activities and the split of responsibilities between the PRA and the FCA.
  - The FPC may recommend adjustments to the macroprudential toolkit (including on the need for further powers of direction).
  - Powers of direction are prescribed by the Treasury and approved by Parliament; an expedite process temporarily waiving the need for Parliamentary approval is in place in case of emergency (based on the Treasury’s stated opinion).

### Domestic coordination and cooperation
- Formal mechanisms to foster coordination across agencies include:
  - Information sharing responsibilities.
  - References to financial stability in the mandates of the microprudential regulators.
  - The duty of the FPC to have regard (as far as possible) to the microprudential regulators’ objectives.
  - Overlapping memberships across governing bodies.
- Specific coordination arrangements:
  - The FCA and the PRA’s chief executives are both members of each others’ respective Boards, and both are members of the FPC.
  - The BoE Governor is Chair of the FPC, the MPC, and the PRA Board.
  - The oversight of financial market infrastructures (FMI) sits within the BoE, headed by the Deputy Governor for Financial Stability who sits as an FPC member; the FPC can make recommendations on issues relevant to financial infrastructures.
- Housing FPC and MPC within the BoE with overlapping memberships facilitates information sharing and a common understanding of judgments and likely policy responses.
  - Members of each committee can attend the other committee’s briefing meetings.
  - Committees are prompted in remit and recommendation letters from Treasury to be clear on how they have had regard for the actions of the other in policymaking.
- BoE initiatives to exploit complementarities:
  - “One Bank, One Mission” three-year initiative to promote increased connectivity and a common culture within the BoE, including shared information, analyses, and more frequent joint meetings between the MPC, the FPC, and the PRA Board.
  - Coordinated research agenda focusing on the intersection between monetary, macro and microprudential policy.
  - Joint production of analysis that goes to decision-making committees on common-interest areas.
  - FPC has held joint briefings and discussions with both the MPC and the PRA Board on stress testing, long-run risks from China, and housing policy.
  - Four joint briefing meetings between MPC and FPC were scheduled for 2016.
- Examples of coordination in practice:
  - Forward guidance and knock-out: MPC provided the FPC with a knock-out power so guidance would cease if FPC judged monetary policy posed a significant threat to financial stability that could not be contained by available micro and macroprudential tools.
  - Stress testing exercise: Since 2014, the BoE stress testing exercise is conducted jointly by the FPC and the PRA Board, drawing on expertise from across the Bank.
  - Housing market: Under FPC direction, the BoE, PRA, and FCA took coordinated measures (2014) — via the FCA to require lenders to apply a stressed affordability test, and via the PRA to limit high loan-to-income ratio loans by banks and building societies.

### Evolving FPC engagement with the FCA and broader systemic focus
- During the FPC’s first years, it advanced its relationship with the PRA more than with the FCA due in part to significant focus on the banking system.
- As the FPC broadened focus beyond banking to other financial sectors and systemic non-financial risks:
  - Interactions between BoE and FCA staff have strengthened significantly over the last year.
  - The FCA has had more active participation in FPC briefing stages.
  - Joint working and coordination groups have been established to focus on asset management and market liquidity, hedge funds and cyber risks.
  - Joint deep dives into various industries will determine levels of systemic relevance and provide opportunities for relationship building, coordination, and information flow.

### International cooperation
- Given the size and international nature of the U.K. financial sector, macroprudential policy gives significant emphasis to multilateral issues:
  - The U.K. hosts many international financial companies and is home to several financial firms with a large overseas presence.
  - The U.K.’s financial stability depends on effective global and European macroprudential surveillance and sound, consistently implemented international regulatory standards and EU rules.
  - Cross-border risks, leakages, and spillovers can reduce effectiveness of national macroprudential action.
- FPC stated intentions:
  - To cooperate with relevant EU institutions and through other global fora to ensure macroprudential policy decisions are implemented effectively and cross-border leakages are dealt with appropriately.
  - To have due regard to the impact of its decisions on jurisdictions both inside and outside the EEA.

*Italic: IMF staff summary of chapter 11 from the provided document.*

### 24.      Consistent with their stated intentions, the U.K. authorities have been actively

### Consistent with their stated intentions, the U.K. authorities have been actively involved in international organizations where financial stability risks are discussed, policies are coordinated, and standards are set.

### International engagement and information sharing
- The FSB (global level) and the ESRB (EU level) are key fora for international cooperation, data sharing and coordination.
- The BoE governor (and chair of the FPC) is the acting head of the FSB and the vice-head of the ESRB.
- The FPC has asked BoE and FCA staff to engage actively in international fora on cross-border financial stability risks, such as market liquidity and cyber risk.
- Legislation allows the BoE to disclose information to foreign authorities with functions similar to those of the Treasury, BoE or the FCA.
- The FCA maintains a number of “gateways” which allow it to share confidential supervisory information, where appropriate, to assist or enable other regulators to carry out their functions.

### EU regulatory engagement and constraints
- The U.K. authorities have engaged actively in the EU regulatory framework legislative process.
- Regulatory standards implemented at the EU-level either through directly applicable Regulations or maximum-harmonized Directives typically leave no scope for the U.K. to put in place further rules or domestic legislation once the EU rules are in place.
- The FPC cannot give a direction or make a recommendation that would contravene provisions of EU law.
- EU prudential rules for the core financial system (i.e., the Capital Requirements Regulation (CRR) and Directive for banks, building societies and investment firms) do allow for a degree of flexibility when dealing with financial stability matters.

### Reciprocity, cross-border leakages, and use of the CCB
- The FPC has reciprocated macroprudential policies by foreign counterparts, but reciprocity for U.K. measures remains untested.
- Reciprocity arrangements mitigate cross-border leakages by ensuring the same regulatory constraints are applied across all relevant providers of credit in the region (including cross-border lending and lending via foreign branches).
- EU legislation (applicable in the U.K.) sets out a formal coordination arrangement for the CCB starting in 2016, which is mandatory within a certain range (and voluntary otherwise).
- The FPC has reciprocated foreign CCB rates ahead of schedule (including CCB rates set in Norway, Sweden and Hong Kong).
- Reciprocity is a cornerstone of the Basel III agreement on the CCB; the expectation is that the U.K.’s CCB will also be reciprocated back by jurisdictions beyond the EEA as the CCB is used in the coming years.
- For tools other than CCB, reciprocity across jurisdictions (including within the EEA) typically works on a voluntary basis and remains mostly untested.
- Recommendation: The authorities should keep developments under review and assess the need for additional bilateral agreements or stronger regional agreements.
- The ESRB has recently proposed a framework for facilitating reciprocity within the EEA (beyond CCB).

### Host authority control versus market access
- An alternative to reciprocity is establishing closer regulatory and supervisory control for host authorities over foreign branches.
- Within the EEA, legal constraints prevent stronger host control, as it is deemed contrary to a common market in financial services.
- For non-EEA branches, PRA authorization is centered on: the quality of the home state’s supervision; the activities undertaken by the U.K. branch; and the level of assurance that the PRA gains from the home state supervisor over resolution.
- If deemed necessary, non-EEA international banks wishing to undertake critical economic functions (e.g., retail or corporate banking) in the U.K. could be required to set up a U.K. subsidiary.
- Statistic: Foreign branches operating in the U.K. account for roughly one third of the banking sector assets, two thirds of which correspond to non-EEA branches.

### Accountability: overview
- New responsibilities and powers assigned to the BoE have been matched with stronger accountability arrangements.
- The BoE has operational independence to achieve its financial stability objective.
- The BoE is accountable to the general public and Parliament (through the Treasury Select Committee of the House of Commons).
- Inherent difficulties in accountability include: the financial stability objective is hard to quantify; failure to preserve stability could become known with a considerable lag; and the FPC typically focuses on “tail-risks,” so successful prevention can be observationally equivalent to unnecessary action.

### Communication tools and requirements
- The accountability framework relies on a broad range of required communication tools to help the public assess whether the authority is taking appropriate action and to influence macroprudential policymaker conduct.
- Financial stability strategy:
  - The BoE’s Court of Directors (in consultation with the FPC) is required at least every three years to produce and publish a strategy in relation to its financial stability objective, which the FPC must take into account.
  - An initial financial stability strategy was adopted in September 2013 and later updated in 2014.
  - The strategy specifies preserving the three vital functions of the financial system: (i) providing the main mechanism for paying for goods, services and financial assets; (ii) intermediating between savers and borrowers; and (iii) insuring against and dispersing risk.
- FPC meeting records:
  - Must specify any decisions taken, including decisions to take no action, and must set out a summary of deliberations for each decision.
  - Records must be published no later than six weeks after the meeting, although publication of some information may be deferred if judged to be against the public interest.
  - All FPC members work through and sign off on the record.
- Financial stability report (FSR):
  - The FPC must publish an FSR twice every year.
  - The FSR is required in legislation to include (as it relates to the U.K. financial system): the FPC’s view of stability at the time of the report’s preparation; an assessment of the developments that have influenced the current position; the strengths and weaknesses; risks to the stability; and the FPC’s view of the outlook for stability.
  - The FSR must also report the FPC’s view of progress against previous Recommendations and Directions, and any new policy actions taken to reduce and mitigate risks to stability.
  - Changes to the FSR structure introduced in 2015 have streamlined the document and improved focus by prioritizing among risks.
- Policy statements and core indicators:
  - For tools over which the FPC is given direction powers, it must publish a statement it proposes to follow for the exercise of such power.
  - Statements published to-date identify a set of core indicators that must be routinely reviewed to guide the use of each tool.
  - While these indicators do not constrain FPC behavior, they play an important role for accountability and communication and favor consistency and predictability.

### Decision-making transparency and conduct
- The communication framework aims for clear and consistent messages while recognizing the importance for accountability of transparency in the range of arguments expressed in FPC deliberations.
- The framework for FPC decision-making and communication is established by the Bank of England Act of 1998 (as amended by the Financial Services Act), the Chancellor’s annual remit and recommendations, and the FPC code of conduct.
- The Act states that FPC should reach decisions by consensus wherever possible, or by vote if consensus cannot be reached.
- The Chancellor’s remit and recommendations stress providing clear, focused and consistent communication around FPC decisions; where decisions are by consensus communication by individual members needs to be coordinated and consistent.
- Where consensus cannot be reached and decisions are made by vote, the balance of arguments should be reflected in the meeting records; members should be free to explain their differences and will be publicly accountable accordingly.
- The FPC code of conduct (as amended in 2015) requires meeting records to reflect the range of arguments in reaching FPC decisions; members are fully entitled to explain their policy position but should respect consensus when reached; where a decision is made by vote, individual members’ votes are to be reflected in the meeting records.

### Public awareness, outreach, and challenges
- The FPC must continue promoting public awareness and understanding of the Committee.
- Communication with markets and the public can foster understanding of the benefits of specific macroprudential tools.
- A broad-based understanding among the general public of the importance of financial stability and the FPC’s role is important to underpin the long-run legitimacy of the Committee.
- Outreach activities:
  - FPC members make a combined total of approximately 15 FPC-related speeches per year (published on the BoE’s website).
  - Members undertake press interviews, panel discussions at conferences, op-eds, regional visits and market intelligence meetings.
  - Additional outlets include Quarterly Bulletin articles, working papers, and Bank Underground blog-posts.
- Public understanding of the FPC’s role and responsibilities remains low relative to the MPC and more work will be needed in the coming years.
- Statistic: At Spencer Dale’s appointment hearing by the Treasury Select Committee on April 30th 2014, the Committee Chair quoted a survey showing that only 11 percent of those interviewed had heard about the FPC (of which at least one third had a wrong impression of what its work consisted of).
- Challenge: continue building a well-understood policy reaction function so communications can steer market expectations on how and under what circumstances any given policy tool will be used.

### Treasury Select Committee: role and practices
- FPC members give evidence regularly before the Treasury Select Committee in Parliament.
- The Treasury Select Committee examines the expenditure, administration, and policy of the Treasury and associated public bodies, including the BoE, the PRA and the FCA.
- The Committee chooses its own subjects of inquiry; inquiries may give rise to a report with recommendations or publish oral evidence.
- Hearing types and practices:
  - FSR meetings: the Committee holds hearings twice a year on the FPC’s FSRs; each hearing typically includes the BoE Governor, a Deputy Governor, and two FPC external members; hearings are used to gather evidence on international regulatory reform, U.K. institutional design, FPC independence and practices, and other issues.
  - Appointment hearings: the Committee holds hearings with persons appointed or re-appointed to the FPC and reports on those hearings; personal independence and professional competence are criteria used to assess suitability.
  - Topical inquiries: the Committee may undertake inquiries on specific topics, including financial regulation, accountability of the BoE, proposals by the Independent Commission on Banking, and macroprudential tools.
- Hearings are typically public; oral and written evidence are published and the most recent hearings are available for online watching; inquiries may also be conducted in written form with letters and responses typically placed in the public domain.
- Evidence suggests the Treasury Select Committee has been influential despite its recommendations being non-binding.
  - Examples of influence: pushing for direction powers over the leverage ratio to the FPC ahead of Treasury’s original intention; modifications to the FPC code of conduct regarding conflict-of-interest review and political activities of members and communication transparency.
- Appointment considerations and past concerns:
  - The Committee has used personal independence and professional competence as suitability criteria—the same criteria for MPC and OBR appointments.
  - The Committee does not have veto powers over appointments to the MPC nor the FPC (it does for the OBR).
  - The Committee has at times expressed public concern about specific appointments (examples cited in Committee records).

### Oversight Committee and Independent Evaluation Office
- The Oversight Committee is a sub-committee of the Court of the BoE consisting of its non-executive members.
- Functions include keeping under review the performance and procedures of the FPC and the BoE’s performance in relation to its objectives (including financial stability).
- The Oversight Committee has access to all FPC briefing material; up to two Committee members may sit as observers at any FPC meetings.
- It may appoint experts to conduct performance reviews, provided these are retrospective and not related to current policy; performance review reports are to be published (publication may be delayed if judged to be against the public interest).
- The Committee must report on its duties in the BoE’s Annual Report and some of its work is reflected in the Court minutes.
- The Oversight Committee is accountable to Parliament via the Treasury Select Committee.
- Note on potential conflicts: an external member of Court (and therefore a member of the Oversight Committee) may be appointed as an external member of the FPC; care should be taken to watch for potential conflicts of interest this may represent.

- The Independent Evaluation Office:
  - Established in 2014 to support the Committee in discharging its statutory obligations.
  - Staffed by a small permanent secretariat, supplemented with staff seconded from within the BoE or with external support.
  - Reports directly to the chair of the BoE court (and of the Oversight Committee).
  - Undertakes one-off assessments of areas of the BoE’s work, facilitates broader Court oversight of the performance of the BoE’s policy areas and strategy, and may provide support for external reviews of the BoE.

*IMF staff report excerpt.*

### 36.      With privileged access to FPC materials and deliberations, the role of the Oversight

### With privileged access to FPC materials and deliberations, the role of the Oversight

### Oversight Committee role and reviews
- The Oversight Committee complements the Treasury Select Committee by having privileged access to FPC materials and deliberations and acting as an internal cross-check and disciplining device. Committee members have typically exercised their right to attend FPC meetings.
- Process review:
  - Informed by structured questionnaires and individual meetings of the Committee chairman with all FPC members.
  - The Committee monitors FPC members’ satisfaction with BoE staff support and members’ views on interactions with other decision-making bodies.
  - In 2015, the Committee reviewed and approved proposed amendments to the communication section of the FPC Code of Conduct.
  - The FPC has suggested the Oversight Committee could include an assessment of the robustness of FPC deliberations in the BoE’s Annual Report.
- Performance review:
  - To date, performance reviews of the FPC against its objectives, as portrayed in the BoE’s Annual Report (2014 and 2015), have been mostly descriptive.
  - No external performance review centered on macroprudential policies (or processes) has yet been commissioned.
  - External reviews on other subjects (for example, the Warsh review on “Transparency and the Bank of England’s Monetary Policy Committee”) have played an influential role historically.

### Tradeoffs and risks of concentrating powers in the BoE
- Concentrating responsibilities and powers within the BoE favors coordination but increases the potential for a “groupthink” mentality.
- Safeguards and mitigating factors:
  - FPC external members bring different knowledge and insights and are less likely to be absorbed in the “institutional view.”
  - The Treasury Select Committee and the Oversight Committee should continue to monitor effectiveness of deliberations and whether external members feel empowered to challenge risk identification and policy assessments.
  - The Treasury may at any time make recommendations to the FPC on how to interpret its mandate; such recommendations must specify in writing an intention to comply or reasons not to do so.
  - The Treasury’s most recent remit and recommendation letter prompted the FPC to seek, when appropriate, views of industry participants, academics, other regulators and the public.
- Risk to sustained focus on financial stability:
  - The effectiveness of the framework depends on a continued strong focus on financial stability given the U.K. financial system’s size and systemic nature.
  - As memories of the last crisis fade, external pressures for inaction are likely to intensify and BoE resources on FPC issues could be squeezed by competing demands from other policy functions.
  - Parliament, the Treasury, and all agencies—first and foremost the BoE—have responsibility to protect against this risk.
  - The FPC should persist in efforts to promote public understanding of its role and responsibilities.

### Operational framework: overview
- The assessment focuses on processes for monitoring systemic risk (including beyond the core financial system), data gaps, and the U.K. macroprudential toolkit.
- Key observations:
  - The FPC has established a functional process for identifying systemic risk and mapping risks into policy action.
  - Risk assessment is conducted as a regular (quarterly) surveillance process, drawing on a broad range of indicators, market intelligence, supervisory insights and analysis by BoE staff (including the PRA) and the FCA.
  - Progress has been made on data gaps and additional initiatives are underway.
  - An annual dedicated discussion on the regulatory perimeter has been established.
  - Direction powers exist over tools that mainly target risks from excessive leverage and credit growth (including tools beyond Basel III); the policy for their use is one of “guided discretion.”
  - For managing liquidity and structural risks the FPC relies mainly on its broad recommendation powers.
  - The macroprudential toolkit is still evolving; certain tools are yet to be implemented (the FPC has requested direction powers for tools covering buy-to-let lending, currently under government consultation).

### Process and risk monitoring
- The FPC follows a quarterly schedule with pre-announced dates. A typical quarterly cycle consists of four stages:
  - (i) briefings on financial developments and financial stability risks;
  - (ii) FPC discussions on key financial stability issues and potential macroprudential policies (issues meetings);
  - (iii) policy-making FPC meeting (policy meetings);
  - (iv) communication of risk assessments and policy decisions.
- Staff and inputs supporting the FPC:
  - A dedicated FPC secretariat within the BoE coordinates inputs and supports outputs, including some public communications.
  - A dedicated financial stability directorate at the BoE provides substantial analytical support, organized mainly by sources of risk: real economy (households and corporates), banks, and markets and nonbank financial institutions.
  - Staff in other parts of the BoE (including the PRA, the Markets and the FMI Directorates), the FCA, and occasionally the Treasury provide critical briefing inputs.
  - The FPC and the PRA Board receive a joint Quarterly Risk Pack setting out staff views on main risks to financial stability and supporting analysis; this is a key ingredient of the Financial Stability Report (FSR).
- Indicators and analytical approaches:
  - Authorities analyze a broad range of indicators; a subset of “core indicators” is made publicly available in each FSR (or more frequently in some cases).
  - Core indicators are organized around tools to guide the FPC use of direction powers, which implies:
    - Repetition of indicators across tools where multiple tools target the same risk or where some indicators measure resilience rather than risk.
    - Less indicator-coverage for risks dealt with using recommendation powers (for example, funding liquidity risks in the core financial sector).
  - The authorities may consider organizing “core indicators” around types of “risk” and “resilience” rather than tools to better portray broader monitoring, reduce duplication, and align with the new FSR structure; a possible disadvantage is a less clear mapping from systemic risk analysis to potential policy action for risks addressed by recommendation powers.
  - Qualitative information and analytical exercises supplement indicators, including an annual concurrent stress testing exercise and market intelligence from an extensive contact base; PRA and FCA provide supervisory intelligence.

### Data and information
- Progress:
  - Significant progress on data regarding bank interconnectedness, regulated mortgage lending and derivatives and securities markets.
  - Some progress stems from EU legislation implementation (e.g., EMIR transaction-level derivatives data) and voluntary international initiatives (e.g., G20 Data Gaps Initiative for G-SIBs).
  - Targeted activity includes collection of banks’ large capital market exposures and FCA collection of data on performance of regulated mortgages.
- Remaining material gaps:
  - Major gaps remain in building a complete picture of the U.K. flow of funds, activities of nonbank financial institutions, and the buy-to-let mortgage market.
  - A significant gap in the U.K. flow of funds framework is on securities holdings.
  - Data on buy-to-let mortgage lending (not regulated products) are patchy, with limited coverage on mortgage features such as loan-to-value and interest-coverage ratios.
- Strategy to fill gaps:
  - Joint BoE and Office for National Statistics work to improve flow of funds statistics.
  - Joint BoE and FCA work to improve information on nonbank financial institutions.
  - BoE in-house data collection and joint work with the Council of Mortgage Lenders on the buy-to-let mortgage market.

### Perimeter
- The FPC has committed to hold, at least annually, a dedicated discussion on risks and regulation outside the core banking sector. The FPC held dedicated perimeter discussions in June 2014 and June 2015.
- The FPC’s framework assesses sources of fragility (such as leverage, liquidity/maturity transformation, imperfect credit risk transfer) and three key transmission channels:
  - The provision of critical services (intermediating savers and borrowers, insuring against and dispersing risk, payment services).
  - Risks to systemically important counterparties (problems in the nonbank financial system impacting banks or insurers).
  - Disruption to systemically important financial markets (transmission of distress to important markets).
- The perimeter exercise aligns with FSB high-level policy framework for oversight of shadow banking:
  - Authorities define and update the regulatory perimeter.
  - Emphasis on economic functions (activities) rather than legal forms (entities).
  - Focus narrowed where maturity/liquidity transformation, leverage or imperfect credit risk transfer (“sources of fragility”) exist.
  - Adequacy of existing regulatory framework is considered and proportionality to risks is applied.
- Work to date and ongoing:
  - Over the last two years, systemic risks in activities across 30 different types of institutions and markets have been assessed.
  - The BoE is developing a monitoring framework involving key metrics for each sector; intensity of monitoring will depend on judgment of systemic risk in each sector.
  - The FPC has begun “deep dives” — regular comprehensive analyses of activities beyond core banking — covering fragilities, transmission channels, existing mitigants, ongoing European/international policy work, and residual gaps; initial focus on five activities:
    - (i) investment activities of open-ended investment funds;
    - (ii) investment activities of hedge funds;
    - (iii) securities financing transactions;
    - (iv) non-traditional non-insurance and investment activities of insurance companies;
    - (v) derivative transactions.
  - A review of deep dives conducted to date will be published in the July 2016 FSR.

### Macroprudential toolkit
- Direction powers and tools:
  - Direction powers have been established over tools that mainly target risks from excessive leverage and credit growth (including tools beyond Basel III); policy is “guided discretion.”
  - To date, these tools encompass:
    - the CCB under Basel III,
    - sectoral capital requirements,
    - loan-to-value (LTV) ratios and debt-to-income (DTI) ratios on owner-occupied mortgage lending,
    - the leverage ratio, including a countercyclical leverage ratio buffer and a leverage surcharge for systemically important institutions.
- Other toolkit features and future work:
  - For liquidity and structural risks the FPC relies mainly on recommendation powers.
  - Certain tools remain to be implemented; the FPC has requested direction powers for buy-to-let lending tools (currently under Government consultation).
  - The FPC will continue to reassess needs for further tools as risks evolve and as international standards for certain tools develop.

*Source: _cr16160 - 36 (UNITED KINGDOM, INTERNATIONAL MONETARY FUND).*

### 49.      Legislation grants the FPC a broad set of powers of recommendation and direction.

### _cr16160 - 49.      Legislation grants the FPC a broad set of powers of recommendation and direction.

### Legal scope and institutional arrangements
- Legislation grants the FPC a broad set of powers of recommendation and direction.
- The conduct of macroprudential policy is not limited to those designated tools over which the FPC has directions powers; other policies (including micro-prudential or even non-financial) may better deal with certain types of risks.
- To date the FPC has maintained a broad scope of interest and has operated mostly via its recommendation powers (also, many direction powers did not become available until recently).
- The Government prefers giving the FPC powers of direction over tools that are: specific, subject to sufficient national discretion, and focused on system-wide rather than firm-specific characteristics.
- The FPC prefers a relatively narrow (“parsimonious”) set of direction powers for accountability, policy effectiveness and building a public reaction function for the Committee.
- Implementation of directions may be timelier than for recommendations; direction powers are generally related to mitigating risks in the time dimension, while structural risks will typically be dealt with using recommendations.

### Tools subject to direction powers and coverage
- Direction powers established mainly target risks from excessive leverage and credit growth (including property markets).
- Tools encompassed to date include:
  - sectoral capital requirements for residential (including mortgages) and commercial property exposures;
  - sectoral capital requirements for intra-financial sector exposures;
  - limits on LTV ratios and DTI ratios on owner-occupied mortgage lending;
  - the leverage ratio (including a countercyclical leverage ratio buffer and a leverage surcharge for systemically important institutions).
- The FPC also sets the countercyclical capital buffer rate for U.K. exposures under Basel III (implemented in Europe under CRR/CRD IV).
- Coverage of these direction powers is mainly those U.K.-authorized firms that fall under CRD IV/CRR (i.e., banks, building societies and investment firms), although some housing tools can be applied more broadly.
- All statements published so far recognize the potential for policy leakages, which therefore need to be monitored and may require a recommendation to expand the perimeter.
- In all statements the FPC expresses its intention to cooperate with cross-border authorities to ensure effective implementation and address cross-border leakages.

### Statements of general policy and decision framework
- The statements of general policy for such tools are broadly in line with Fund guidance (IMF 2014).
- The FPC is required to publish a policy statement for each of its direction powers. Each statement covers:
  - a description of the tool;
  - its likely impact on financial stability and growth (both a description of the channels and an estimation of its impact);
  - the circumstances under which the tool is expected to be used.
- Use of tools is supported by “guided discretion,” where a set of core indicators is routinely reviewed, but decisions are based on judgment that takes account of all available information (including market and supervisory intelligence, and stress testing results).
- Tools are more likely to be adjusted the greater the deviation from historical benchmarks and the more homogeneous the picture painted by different indicators is.

### Strategies for specific instruments
- Countercyclical Capital Buffer (CCB)
  - The CCB will be used primarily to increase the resilience of banks.
  - The policy strategy aims to match the resilience of the system to the changing scale of risks it faces.
  - The assessment relies on judgment informed by a set of core indicators, market and supervisory intelligence and stress-testing exercises.
  - The FPC intends to set the CCB above zero before risks become elevated, with the CCB in the region of one percent when risks are neither subdued nor elevated.
  - The U.K. strategy favors moving early and gradually, taking into account the uncertainty in measuring risks, the 12-month implementation lag and the likely lower costs of allowing banks to adjust via retained earnings.
  - If risks crystallize, the FPC may cut the CCB rate, including where appropriate to zero percent.
- Leverage buffers
  - The policy strategy is to scale the leverage buffer up in proportion to any countercyclical capital buffer on U.K. exposures and also for systemically important banks.
  - The principle behind the FPC’s leverage requirements is that they are 35 percent of a firm’s risk-weighted equity requirements.
  - The FPC views the purpose of additional systemic and countercyclical leverage buffers as to absorb the impact of stress.
- LTV/DTI tools
  - When implementing LTV/DTI tools, the FPC could apply limits based on two parameters: the LTV or DTI ratio threshold, and the proportion of the flow of new mortgages that lenders could extend above that threshold (either in volume or in value).
  - The tool allows more flexibility than a hard cap on LTV or DTI ratios.

### Liquidity tools, PRA role, and timing
- Tools to address funding liquidity risks in the core financial sector sit with the PRA and may be influenced by the FPC via recommendation.
- After the global financial crisis, an overhauled liquidity framework was introduced. The PRA provided firms with individual liquidity guidance.
- In 2012, the interim FPC recommended relaxing liquidity requirements taking into account contingent liquidity from the BoE.
- The PRA is transitioning to a new liquidity regime following introduction at the EU level of the Liquidity Coverage Ratio (LCR), which is formally phased-in from 2015 until 2018.
  - By FPC recommendation, the PRA moved ahead of schedule and applied an initial transitional requirement higher than stipulated in the CRR (i.e., 80 percent instead of 60 percent LCR ratio).
  - The EU version of the BCBS Net Stable Funding Ratio (NSFR) will be introduced in 2018.
- The FPC has stated it would consider asking for powers of direction to set bank liquidity requirements and margin requirements in securities financing markets once international standards have been agreed upon.

### Systemic institutions and higher loss absorbency
- The FPC may influence policies towards systemically important firms using its recommendation powers; U.K. authorities rely on intensified supervision, enhanced loss absorbency and improved resolvability and resolution.
- Financial Services (Banking Reform) Act 2013 requires ring-fencing of critical activities for the largest deposit takers; the ring-fence is to be implemented by the PRA by 2019.
- The FPC established a medium-term priority to review and where necessary act to influence design and implementation of reforms to address “too-big-to-fail”, including:
  - the process for identifying U.K. domestic systemically important banks (D-SIBs);
  - macroprudential objectives to consider when setting the height of the ring-fence;
  - protocols around stays in derivative contracts;
  - policies on resolution and on recovery and resolvability;
  - the U.K. framework for ‘gone concern’ loss-absorbing capacity.
- Framework for higher loss absorbency is shared:
  - G-SIB identification and additional loss absorbency requirements lie with FSB, implemented by PRA via BCBS framework.
    - The FSB initial list of banks that will be subject to a G-SIB capital surcharge starting in 2016 includes four U.K. headquartered banks.
    - G-SIB buffers will be phased in to come into full force by 2019.
  - The PRA, following EBA guidelines for O-SII identification, is responsible for identifying domestic and regional systemically important banks beginning in 2016.
  - The provisions of CRD IV requiring O-SII to maintain a specific O-SII buffer are not mandatory and the U.K. is not implementing them.
  - A systemic risk capital buffer (SRB) will apply to ring-fenced banks and large building societies due to their relative importance to the U.K. economy.
    - The systemic risk buffer will be applicable starting from 2019.
  - The FPC is responsible for establishing a framework to measure the systemic importance of ring-fenced institutions and mapping it into buffer rates; a framework proposal is currently under consultation and will be subject to review every two years.
- PRA-regulated banks and building societies with core deposits greater than £25 billion will be subject to ring-fencing.

### EU law, national flexibility, and constraints
- The FPC cannot give a direction or make a recommendation that would contravene the EU prudential rules for banks, building societies and investment firms (i.e., Capital Requirements Regulation and Directive CRR/CRD IV).
- Under CRR/CRD IV national authorities have a degree of flexibility when dealing with financial stability matters.
  - Within CRD IV, the CCB, the systemic risk buffer and (to a lesser extent) the G-SIB surcharge are flexible to capture local circumstances.
  - Pillar 1 of CRR allows authorities to impose higher capital requirements in respect of residential and commercial property (and intra-financial system exposures) on financial stability grounds.
  - “National flexibility measures” can be set at national level to address systemic risk, subject to notification and non-objection by the European Council; the process may take up to three months.
  - Pillar 2 provisions in CRD IV allow imposing additional capital requirements to address risks not adequately captured under Pillar 1.
  - Housing tools and the leverage ratio are not covered by the scope of EU legislation and are therefore established under the national legal framework.
- Note: The FPC’s power to set the UK countercyclical capital buffer is not a power of direction, as it is established through European law rather than the UK legislation that governs the FPC’s powers of direction.
- Note: Because the range for the systemic risk buffer as implemented in the U.K. is below three percent, the European framework requires notification but not authorization.
- Note: The flexibility of the G-SIB surcharge is materially less than for either the systemic risk buffer or countercyclical capital buffer: the PRA can only exercise supervisory judgment to move firms up or down by a single G-SIB bucket, and even this is subject to the approval of the Basel Committee / FSB.

### Evolution of the toolkit and pending implementations
- The macroprudential toolkit in the U.K. is still evolving; a number of tools are to be implemented over the coming years, including:
  - NSFR (2018);
  - the leverage ratio for banks other than G-SIBs (2018);
  - the SRB for ring-fenced banks (2019);
  - the leverage surcharge for ring-fenced banks (2019);
  - higher-loss absorbency requirements for global systemically important insurers (2019).
- The FPC has requested direction powers over tools related to buy-to-let lending; Government is undergoing consultation on these tools.
- Further tools may be identified following BoE/FCA and international work on market liquidity issues.

*Source: IMF staff based on the content of the document _cr16160 - 49.      Legislation grants the FPC a broad set of powers of recommendation and direction.*

### Appendix III. Bank of England“Core Indicator” Coverage by

### Appendix III. Bank of England“Core Indicator” Coverage by Source of Risk

### Household sector — IMF indicators and BoE core indicators
- Household mortgage loan growth rate
- Household credit growth
- Household and CRE credit growth (SCR)
- Share of household mortgage loans to total credit
- House price growth
- House price growth by region and type of property
- House price to rent ratio
- Rental yield
- Residential price-to-rent ratio (SCR)
- House price-to-disposable income ratio
- LTV ratio
- LTV ratio on new residential mortgages
- Residential LTV (SCR)
- DSTI ratio
- LTI ratio
- LTI ratio on new residential mortgages
- Residential LTI (SCR)
- Household credit gap
- Share of banks' and nonbanks' household loans
- Share of FX-loans or interest-only loans
- Other
- Household debt to income ratio
- Mortgage approvals
- Housing transactions
- Spreads on new residential mortgage lending

Note: DSTI= debt servce to income ratio; LTV=loan-to-value ratio; LTI= loan-to-income ratio; SCR= sectoral capital requirements.

*Source: IMF staff.*

### Corporate sector — IMF indicators, BoE indicators, and corresponding FPC tools
- Growth rate in corporate credit
  - PNFC credit growth — CCB
- Share of corporate credit in total credit
- CRE credit growth
  - CRE credit growth — SCR
- CRE prices
- Leverage on new and old loans
- PNFC debt to profit ratio — SCR
- Corporate debt service ratio
- Corporate credit/operating surplus
- Corporate credit gap
- Lending standards
- LTV ratio on new residential mortgages (buy-to-let) — LTV/DTI
- Share of FX loans and natural hedges — Other
- Spreads on new UK corporate lending — CCB
- Spreads on new UK CRE lending — SCR

Note: CCB= countercyclical capital ratio; CRE=commercial real estate;  LTV=loan-to-value ratio; LTI= loan-to-income ratio; SCR= sectoral capital requirements.

*Source: IMF staff.*

### Liquidity indicators
- Loan-to-deposits ratio — Loan-to-deposits ratio — CCB
- Noncore-to-core funding ratio
- Short-term wholesale funding ratio — CCB
- Liquid asset ratio (e.g. Basel III LCR)
- Maturity mismatch indicators (e.g. Basel III NSFR)
- Securities issuance
- Unsecured funding
- Gross open FX-position
- Short-term capital inflows

*Source: IMF staff.*

### Appendix IV. U.K. Macroprudential Toolkit — Tools, legal basis, perimeter, reciprocity, timing, decision, implementation
- Sectoral capital buffer (residential/commercial mortgage and intrafinancial exposures)
  - Legal basis: Pillar 1 or 2 CRD, or Art. 458 CRR
  - Agency in charge of decision: FPC PoD
  - Implementation: PRA
  - Perimeter: UK incorporated "CRD institutions"
  - Reciprocity: Voluntary
  - Timing/introduced: 2013
- Countercyclical capital buffer
  - Legal basis: Art. 130, 135-140 CRD
  - Decision: FPC
  - Implementation: PRA/FCA
  - Perimeter: UK incorporated "CRD institutions"
  - Reciprocity: EEA: mandatory up to 2.5% ; Other countries: voluntary
  - Timing/introduced: 2014
- LTV/DTI limits (residential mortgage lending; owner-occupied)
  - Legal basis: National Law
  - Decision: FPC PoD
  - Implementation: PRA/FCA
  - Perimeter: All PRA- and FCA-authorized firms conducting owner-occupied lending*
  - Reciprocity: Voluntary
  - Timing/introduced: 2015
- Leverage ratio
  - Legal basis: National Law
  - Decision: FPC PoD
  - Implementation: PRA
  - Perimeter and timing:
    - Initially, UK G-SIBs and other major domestic UK banks and building societies. Extended to all UK banks, building societies, and PRA-regulated investment firms from 2018.
    - Introduced: 2015 (systemic) / 2018 (rest)
  - Reciprocity: Voluntary minimum
- Systemic buffer (global)
  - Perimeter: UK G-SIBs
  - Timing/implementation: In parallel with systemic risk-weighted buffers.
- Systemic buffer (domestic)
  - Perimeter: Domestically important banks, building societies and PRA-regulated investment firms
  - Timing/introduced: 2019
- Countercyclical surcharge
  - Initially applied to UK G-SIBs and other major domestic UK banks and building societies. Extended to all UK banks, building societies, and PRA-regulated investment firms from 2018.
  - Timing/introduced: 2015 (systemic) / 2018 (rest)
- Liquidity buffers
  - Decision/rec: PRA/FPC Rec
  - Implementation: PRA
  - Instruments:
    - LCR — Arts. 412 and 460 CRR; Perimeter: UK incorporated "CRD institutions"; Phase-in 2015-2018
    - NSFR — Arts. 413 and 510 CRR; Perimeter: UK incorporated "CRD institutions"; Introduce minimum standard in 2018
    - MaP adjustments to liquidity requirements — Art. 458 CRR or Pillar II CRD; Perimeter: UK incorporated "CRD institutions"; Reciprocity: Voluntary
- National flexibility measures
  - Legal basis: Art. 458 CRR
  - Decision: BoE/HMT/FPC Rec
  - Implementation: PRA
  - Perimeter: UK incorporated "CRD institutions"
  - Reciprocity: Voluntary
  - Timing/introduced: 2014
- Pillar II measures
  - Legal basis: Art. 104 CRD
  - Decision: PRA/FPC Rec
  - Implementation: PRA
  - Perimeter: UK incorporated "CRD institutions"
  - Reciprocity: Voluntary
  - Timing/introduced: 2015
- O-SII (identification)
  - Legal basis: Art. 131 CRD
  - Decision: PRA
  - Implementation: PRA
  - Perimeter: List identified following EBA guidelines.
  - Identification from 2016.
- G-SII capital buffer
  - Legal basis: Art. 131 CRD
  - Decision: PRA
  - Implementation: PRA
  - Perimeter: List identified by FSB- BCBS
  - Phase-in 2016-2019
- Systemic risk buffer
  - Legal basis: Art. 133 CRD
  - Decision: FPC/PRA
  - Implementation: PRA
  - Perimeter: Ring-fenced banks and large building societies.
  - Timing/introduced: 2019
- HLA for global systemic insurers
  - Decision and implementation: PRA
  - Perimeter: List identified by FSB-IAIS
  - Timing/introduced: 2019

Notes:
- "CRD institutions" include banks, building societies and investment firms (regulated in the UK by PRA or FCA). PRA also maintains large exposure limits for banks, but this has not been used as a macroprudential tool.
- *When implemented through prudential requirements, this includes mortgage lending by overseas lenders' UK subsidiaries and branches regulated by the PRA, but excludes EEA branches conducting mortgage lending through EEA passporting rights, unless the measures are reciprocated by the relevant foreign authorities.
- Source: IMF staff. Note: EEA=European Economic Area; FCA= Financial Conduct Authority; FSB= Financial Stability Board; HLA=higher loss-absorbency; MaP= Macroprudential; PoD=Power of Direction; Rec=Recommendation.

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16160.pdf_