The contribution of the Financial Policy Committee to UK financial stability

1: Introduction

This article describes the role and powers of the Bank’s Financial Policy Committee (FPC), which plays a central role in the Bank’s financial stability work, and the processes supporting the Committee. This material updates a 2013 article on this topic, in order to reflect how the FPC has operated in practice over the decade since it was established.

2: The contribution of the Financial Policy Committee to UK financial stability

2.1: The role of the FPC

As part of the reforms to the UK regulatory framework that came into force in April 2013, the FPC was formally established as the UK’s macroprudential authority. It has a primary statutory objective to contribute to the achievement of the Bank of England’s financial stability objective ‘to protect and enhance the stability of the financial system of the United Kingdom’.

The FPC’s responsibility in relation to achieving that objective relates ‘primarily to the identification of, monitoring of and taking of action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system’.

The FPC’s task is not to achieve resilience at any cost, however. Its actions to enhance the resilience of the UK financial system should not have ‘a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term’.

The FPC is further tasked, subject to meeting its primary objective, with supporting the Government’s economic policy, including its objectives for growth and employment. The FPC’s pursuit of financial stability often complements this secondary objective. Financial stability is a precondition for sustainable economic growth – a stable, resilient and innovative financial system helps facilitate a sustainable and efficient flow of funds within the economy and an effective allocation of savings to investment. Action to increase resilience may in some circumstances have a short-term effect on financial services activity and growth, even when that action will make a positive contribution to growth in the medium and longer term. The FPC considers this as part of its assessment of the costs and benefits of its policy actions.

HM Treasury is required to give the FPC written notice each year of the Government’s economic policy and must make recommendations about the FPC’s responsibilities for financial stability. The Treasury may also make recommendations to the Committee, including regarding the Committee’s responsibility in relation to support for the Government’s economic policy and matters that the Committee should have regard to in exercising its functions. The FPC must respond formally to this ‘Remit and Recommendations’ letter and provide reasons if it proposes not to follow the recommendations.^{footnote [1]}

2.2: What are systemic risks?

Systemic risk is defined in the Bank of England Act 1998 (‘the Act’) as ‘a risk to the stability of the UK financial system as a whole or of a significant part of that system’. These risks could arise in the UK or overseas. Examples of systemic risks highlighted by the legislation include: risks relating to structural features of financial markets, such as connections between financial institutions; risks relating to the distribution of risk within the financial sector; and unsustainable levels of leverage, debt or credit growth.

Risks relating to structural features of financial markets, such as connections between financial institutions

Linkages among financial institutions – including via common membership of payment, settlement and clearing systems – can, if infrastructure is safe and secure, bolster system resilience, by allowing risks to be shared and managed.

At the same time, intrafinancial system activity can create frictions in the system that lead to excessive risk taking. For example, prior to the global financial crisis, the securitisation of loans dispersed risk in such a way that it reduced incentives to screen and monitor lending. This impairment in underwriting standards, in turn, led to an excessive supply of credit to the real economy.

Another example is funding chains between banks and other financial intermediaries, which can mean that system-wide maturity transformation may be high even though maturity transformation at any individual institution may appear small. A system with longer, larger or more opaque chains of intrafinancial system claims is also more prone to amplifying shocks through counterparty risk.

Similarly, cross-border exposures create interlinkages between different financial systems that could cause a shock in one jurisdiction to spread to others; for example, through direct credit losses or via financial market pricing.

Risks relating to the distribution of risk within the financial sector

Risks may be concentrated in specific parts of the system, for example in large financial institutions with a significant footprint in financial markets, or at critical financial market infrastructure providers, such as central counterparties. When a given amount of risk is concentrated in a small number of institutions or markets, when positions and behaviour are highly correlated, or when the provision of financial services is highly concentrated, the system is likely to be more vulnerable than if risks and the provision of services are more evenly distributed. Without adequate safeguards, distress or failure of a systemically important entity or group of entities can trigger significant spillovers to other financial institutions or the wider economy. These network externalities arise because individual institutions or infrastructure providers typically do not take sufficient account of the effects of their actions, or failure, on others.

Unsustainable levels of leverage, debt or credit growth

A third dimension to systemic risk relates to the cyclical build-up of debt or leverage. After an extended period of stability, financial firms, households and companies may take decisions to lend or borrow that make sense while economic conditions remain benign but, collectively, make the system as a whole vulnerable to shocks. This is often exhibited in the form of a relaxation of the terms and conditions on lending and transactions in financial markets – for example, higher loan to value (LTV) and LTI lending, a compression in lending spreads, lower margin or haircut requirements on secured financing transactions, and an easing of covenant restrictions or fall in the quality of collateral required on secured lending. A sudden economic slowdown can then lead to unexpected and widespread losses. The scale of losses across the system, and wider economic impact, may be amplified if lenders have insufficient capacity to absorb losses and as a result rein back on new activity, or if heavily indebted borrowers cut back significantly on consumption or investment.

Excessive credit expansion, often in the real estate sector, has characterised the build-up to most financial crises in the past, from the Great Depression, to emerging market crises in Latin America and East Asia, to the global financial crisis in 2008.

Other sources of systemic risk

These examples of systemic risks in the legislation are not exhaustive.

For example, operational resilience has become increasingly important to maintaining financial stability over time, as the financial system has become more digitalised and interconnected. Operational disruptions result from inadequate or failed internal processes, people and systems and from external events, such as cyber-attacks or pandemics. They can be the source of shocks to the wider financial system, or they can act as amplifiers in episodes of financial stress, for example if a disruption in operations causes risks to emerge. Operational disruptions at systemically important institutions or in systemically important financial markets – including via the disruption of material services provided by critical third-party service providers – can directly affect the ability of the financial system to supply vital services.

Firm-level operational resilience, built by individual firms and financial market infrastructures (FMIs), provides the essential foundation for operational resilience across the system. But system-level vulnerabilities mean that the resilience of individual firms and FMIs alone may not be sufficient to ensure system-wide resilience. These vulnerabilities include: interconnectedness, complexity and opacity; concentration; correlation and common vulnerabilities; and system-wide dependence on data. These vulnerabilities mean that operational incidents can lead to contagion across the financial system and therefore system-wide policies and tools are needed in addition to firm-level measures.^{footnote [2]}

Other sources of systemic risk could reflect innovations in financial markets, such as cryptoassets and decentralised finance.^{footnote [3]}

2.3: Who is on the FPC?

The composition of the FPC and its location in the central bank means it is able to draw on a diverse range of experience, specialist knowledge and a wide range of information to equip it to effectively identify, monitor and take action to address systemic risks.

The FPC has 12 voting members:

• The Governor (who chairs the FPC);
• The Deputy Governors for Financial Stability, Monetary Policy, Prudential Regulation, and Markets & Banking;
• The Bank’s Executive Director of Financial Stability Strategy & Risk;
• The Chief Executive Officer of the FCA;
• and five external members; and
• in addition, a representative of HM Treasury is a non-voting member of the FPC.

Several members of the FPC are also members of the Bank’s other statutory committees (Figure 1), meaning the FPC can benefit from relevant insights from other committees. Monetary Policy Committee (MPC) members can feed in information on developments in the economy and their interaction with the financial system; Prudential Regulation Committee (PRC) members can bring supervisory intelligence relevant to financial stability into the FPC’s discussions; and Financial Market Infrastructure Committee (FMIC) members can detail the latest developments in the supervision and regulation of market infrastructure.

The external FPC members add to the diversity of experience (coming from a range of backgrounds, including the financial sector, academia and policymaking in other jurisdictions) and help bring outside perspectives to issues.^{footnote [4]}

In addition, the Committee often benefits from expertise from other areas of the Bank where the topic is relevant. For example, the Bank’s Executive Directors for Markets and International routinely attend FPC meetings to offer insights on financial markets or global risks.

3: How the FPC takes action

Given the breadth and depth of issues covered by its remit, it is important that the FPC is deliberate when choosing which issues to focus on and what action to take. Once a threat to the resilience of the financial system is identified there are various ways by which the FPC can take action to mitigate it (Figure 2).

One important action it can take is raising awareness of systemic risks among financial market participants by communicating publicly its views on risks and vulnerabilities in the financial system. The FPC is required to publish a Financial Stability Report twice a year which must provide an assessment of the main risks to the stability of the UK financial system. In addition, a Record of the FPC’s deliberations is published after each of its quarterly rounds, summarising the Committee’s judgements and decisions around key risks. At times, simply warning about risks may be sufficient to catalyse action within the private sector to reduce vulnerabilities.

For example, in the run up to the UK leaving the European Union, the FPC regularly updated a ‘checklist’ of arrangements that needed to be put in place to avoid disruption to end-users of financial services at the end of the transition period. The checklist primarily related to actions that other bodies – for example, the UK government or individual firms – needed to take. But summarising it in one place, with an emphasis on the potential disruption that could arise without action being taken, was an important way to focus attention where it was needed.

The Committee is also clear that while it cannot predict all risks, it can focus on building resilience in the system, no matter the risk. And by being transparent and communicating clearly it can support the identification of risks by others and influence how others think about financial stability and act on it themselves. For example, in its 2024 Financial Stability in Focus publication on the FPC’s macroprudential approach to operational resilience, the Committee set out its expectation that key financial firms and FMIs should consider which of their services are vital to UK financial stability when they build their own operational resilience.

However, experience from before the global financial crisis showed that warnings and communication alone are not always enough.^{footnote [5]} The legislation that created the FPC also gave it two main types of power: Recommendations and Directions, details of which are described below.

3.1: Powers of Recommendation

Under its powers of Recommendation, the FPC can make recommendations to the PRA and FCA about the exercise of their respective functions. Such Recommendations can cover any aspect of the activities of the regulators but cannot relate to a specified individual regulated entity. Recommendations made by the FPC to the PRA and the FCA are on a ‘comply or explain’ basis. As such, the PRA and FCA are required to act in accordance with the Recommendation as soon as reasonably practical. If to any extent they do not, they must notify the FPC and explain the reasons for their decision.

For example, in June 2014, the FPC recommended that the PRA and the FCA should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5.^{footnote [6]} Following this Recommendation the PRA and FCA published their approaches to implementing it: the PRA issued a policy statement, including rules, and the FCA issued general guidance.

The FPC can also make Recommendations to other bodies, though not on a ‘comply or explain’ basis, so there is not a statutory obligation on the recipient to respond.

For example, the FPC could issue a Recommendation to the Bank in relation to the provision of liquidity to financial institutions (but not to a particular financial institution) or with regard to its oversight of payments systems, settlement systems and clearing houses. In September 2022, for example, the FPC recommended that the Bank take action to address the risks to UK financial stability from dysfunction in the gilt market.

In relation to the same episode, the FPC also recommended that regulatory action be taken by The Pensions Regulator (TPR), in co-ordination with the FCA and overseas regulators, to ensure LDI funds remain resilient to the higher level of interest rates that they could now withstand, and defined benefit pension scheme trustees and advisers ensure these levels were met in their LDI arrangements. And in March 2023, the FPC recommended that TPR should have the remit to take into account financial stability considerations on a continuing basis.^{footnote [7]}

The FPC can also give Recommendations to HM Treasury, including over the scope of activities regulated under the Financial Markets and Services Act 2000. The basis of this power is a recognition that developments in the structure of the financial system could leave regulatory rules out of date. For example, financial market participants can find ways to avoid regulatory rules, which may lead to risks shifting into new, hitherto unregulated areas. The job of microprudential bodies (such as the PRA and FCA) is to focus on risks to specific regulated institutions. The FPC can look more broadly at the emergence of risks across the system as it evolves and recommend changes to regulation that are needed to maintain stability. That could include a change to the regulatory perimeter – including the division between regulated and unregulated activities and the split of responsibilities between the FCA and PRA.

In total the FPC has made 24 Recommendations since it became a statutory committee in 2013 (with a further 25 being made by the interim FPC that operated between 2011 and 2012), spanning areas like bank capital, the mortgage market, the LDI sector and cyber resilience.

3.2: Powers of Direction

The FPC also has a distinct set of powers to give Directions to the PRA and FCA. These are binding instructions that require the PRA and FCA to deploy specific macroprudential tools prescribed by HM Treasury and approved by Parliament, for these purposes.

Since the creation of the FPC, Parliament has given the Committee powers of Direction over:

• sectoral capital requirements (SCRs);
• leverage ratio requirements and buffers for banks, building societies, and PRA-regulated investment firms; and
• limits on residential mortgage lending (both owner occupied and buy-to-let) in relation to loan to value ratios and debt to income ratios (including interest coverage ratios (ICRs) in respect to buy-to-let lending).

For each of its powers of Direction, the FPC must prepare, publish and maintain a written statement of the general policy that it proposes to follow in relation to the exercise of its powers. The latest policy statements on the FPC's powers of Direction are available at Financial Policy Committee.

The FPC is also required to set the UK CCyB rate.

The FPC can at any time make a Recommendation to HM Treasury in relation to an additional macroprudential measures that it considers appropriate to further its objectives.

The countercyclical capital buffer

The CCyB is perhaps the most well-known of the FPC’s tools, given that the Committee is required to assess and set it quarterly. The CCyB was introduced following the global financial crisis – as part of the Basel III agreement in 2010 – as a tool to address systemic risks posed by financial cycles. The UK CCyB rate is set each quarter by the FPC and enables the capital requirements of the UK banking system to be adjusted in accordance with the changing scale of risk of losses on UK exposures over the course of the financial cycle.

By increasing the CCyB when vulnerabilities are judged to be building up, the FPC ensures banks have an additional cushion of capital with which to absorb potential losses, enhancing their resilience and helping to ensure the stable provision of financial services. In the current context of its overall capital strategy, the FPC judges that the neutral rate for the UK CCyB is around 2%.

The FPC expects to cut the CCyB if it anticipates that the banking system faces the prospect of losses that could otherwise lead it to restrict lending to defend capital positions in the face of a shock, by more than was warranted by the macroeconomic outlook. This means banks have more capacity to lend safely – as they are able to absorb bigger losses before they hit their minimum capital requirements – thereby reducing, or avoiding, any unwarranted reduction in lending.

In this way the tool not only supports the FPC’s primary objective, by helping to ensure the provision of lending in a stress, but also contributes to its secondary objective to support the economic policy of the Government.

Active use of the CCyB has allowed the FPC to act in the face of shocks to help ensure that the UK banking system is better able to absorb losses without restricting lending to the UK real economy. For example, when the Covid-19 pandemic hit, the FPC cut the UK CCyB rate to 0% with immediate effect.^{footnote [8]} In making this decision the FPC noted that the action ‘supports further the ability of banks to supply the credit needed to bridge a potentially challenging period, and reinforces the FPC’s expectation that all elements of the substantial capital and liquidity buffers that have been built up by banks can be drawn down as necessary.’

Sectoral capital requirements

The FPC’s SCR tool – which has not been used to date – is more targeted than the CCyB and allows the FPC to change capital requirements on exposures to specific sectors judged to pose a risk to the system as a whole. The FPC has the power to direct the PRA to adjust banks’ exposures to three broad sectors, namely residential property (including mortgages), commercial property and other parts of the financial sector. In addition, SCRs could potentially be adjusted at a more granular level, for example on mortgages with high loan to value or loan to income ratios at origination.

The CCyB and SCR tools can be applied to all UK-incorporated banks, building societies and large investment firms (for example, broker-dealers).

The leverage ratio

The FPC was granted powers to direct the PRA to set leverage ratio requirements and buffers for banks, building societies and PRA-regulated investment firms in 2015. These powers cover:

• A minimum leverage ratio requirement that applies to major UK banks, building societies and PRA-regulated investment firms; and UK banks, building societies or investment firms with significant non-UK assets.
• A supplementary leverage ratio buffer for UK globally systemically important banks and domestically systemically important banks and building societies.
• A countercyclical leverage ratio buffer that would apply to all firms subject to the minimum requirement.

A leverage ratio is relatively simple indicator of a firm’s solvency that relates a firm’s capital resources to the nominal value of its exposures or assets as opposed to the riskiness of its portfolio. The rationale for a leverage ratio requirement centres on the idea that such a measure can complement the range of regulatory risk-weighted capital requirements that banks are subject to and guard against the danger that models, or standardised regulatory requirements fail to assign risk weights that reflect the true underlying risk of assets.^{footnote [9]}

Housing instruments

The FPC also has the power to direct the PRA and FCA to require regulated lenders to place limits on residential mortgage lending, both owner-occupied and buy-to-let, by reference to:^{footnote [10]}

1. Loan to value (LTV) ratios: the ratio of the value of a mortgage to the value of the property against which it is secured.
2. Debt to income (DTI) ratios, ICRs in respect of buy-to-let lending. The DTI ratio is the ratio of a borrower’s outstanding debt to his or her annual income, and the ICR is the ratio of expected rental income from a buy-to-let property to the estimated mortgage interest payments over a given period of time.

LTV, DTI and ICR instruments directly address risks stemming from the behaviour and balance sheet positions of borrowers, which can affect not just the resilience of lenders, but also directly amplify the effects of economic stress on growth and employment.

The FPC has not yet used its powers of Direction over LTV or DTI/ICR limits, either for owner-occupier or buy-to-let mortgages. The FPC has judged in previous reviews of its housing market policies that the combination of stress testing and bank capital requirements, alongside its existing Recommendation that lenders do not extend more than 15% of their total number of new residential mortgages at LTIs at or greater than 4.5, build a degree of lender resilience that is proportionate to current risks.

3.3: Stress testing

A stress test examines the potential impact of a hypothetical adverse scenario on the health of individual institutions or the system as a whole. In doing so, stress tests allow policymakers to assess resilience to a range of adverse shocks to help ensure the system cannot just withstand those shocks, but also continue to support households and businesses if a stress does materialise.

In 2013 the interim FPC recommended that ‘looking to 2014 and beyond, the Bank and the PRA should develop proposals for regular stress testing of the UK banking system. The purpose of those tests would be to assess the system’s capital adequacy’.^{footnote [11]}

The Bank began concurrent stress testing for banks in 2014 and since then it has undertaken a range of stress tests of the banking system to severe scenarios, adapting its approach as appropriate.

Many of these stress tests have involved scenarios linked to the financial and economic environment. These have included the annual cyclical scenario stress tests – which ran from 2016 to 2019 and again in 2022/23 – and the 2021 solvency stress test designed to assess banks’ resilience to a very severe intensification of the macroeconomic shock arising from the Covid-19 pandemic. Those tests involved the combination of the Bank’s estimates of the impact of the stress scenarios and banks’ submissions of stressed projections under the scenario. The Bank has also undertaken and published the results of two desk-based stress tests (which do not involve banks’ submissions of stressed projections) to test the resilience of the UK banking system to adverse macroeconomic scenarios associated with the pandemic. The Bank is running another desk-based stress exercise in 2024, which will test the resilience of the UK banking system to two hypothetical scenarios, which include severe but plausible combinations of adverse shocks to the UK and global economies.

The Bank has also run a number of concurrent stress tests involving scenarios designed to explore risks which might not be neatly linked to the financial cycle. The focus changes from exercise to exercise, and previous tests (known as ‘biennial exploratory scenarios’ (BES)) have covered risks from persistently low interest rates, liquidity risks and financial risks from climate change.

In 2023, the Bank launched a system-wide exploratory scenario exercise aimed at improving understanding of the behaviours of banks and non-bank financial institutions (NBFIs) in stressed financial market conditions. This includes how those behaviours might interact to amplify shocks in UK financial markets that are core to UK financial stability.

The FPC (together with the PRC) has a key role in designing the scenario for each stress test, analysing and challenging the results, and then in deciding what, if any, action should be taken in light of the results at a macroprudential level. This role involves determining the appropriate severity of the test and, for example, deciding the specific risks each BES should assess.

The results of stress tests have helped inform the FPC’s setting of the UK CCyB rate, as well as additional individual capital buffers set by the PRA. Indeed, this policy co-ordination between committees is a central feature at the Bank, and one of the reasons for overlapping memberships of the FPC with other policy bodies (Figure 1). The FPC also considers the results of stress tests more broadly to help determine whether any additional actions to bolster the resilience of the UK banking system are needed.

The Committee also has a role in helping to shape other stress tests run by the Bank. For example, in June 2017 the FPC set out the elements of the framework of regulation for the UK financial system’s cyber resilience that are necessary to mitigate systemic risk, which included regular testing of firms’ resilience by firms and supervisors. Since then, it has set out details of its impact tolerance – that is the time by which the financial system should be able to make payments in the face of disruption – and has been closely involved in the design of the Bank’s cyber stress tests. In doing so, it helps meet its medium-term priority of continuing to improve macroprudential oversight of operational resilience, in light of its growing importance to financial stability. The FPC is also informed of the results of the PRA’s regular insurance stress tests and the Bank’s central counterparties supervisory stress test.

The Bank has said it will take stock of and update its framework for concurrent bank stress testing in 2024, drawing on lessons learned from its first decade of concurrent stress testing and so continue to support the FPC (and PRC) in meeting their objectives.

3.4: Other FPC responsibilities

In addition to using its powers of Recommendation and Direction, and its role in stress testing, the FPC can influence financial system resilience by giving advice. It is consulted on a range of issues by other bodies. For example, the Bank’s Court of Directors is required to consult the FPC on the Bank’s overall financial stability strategy. The FPC can also advise the Bank on the use of its balance sheet for the purpose of protecting and enhancing the stability of the UK financial system. Principles of engagement between the Bank Executive and the FPC are agreed with the Committee and reviewed every three years. The FPC can also advise on financial stability relevant issues in relation to the MPC’s decisions.

Bank of England staff, under the auspices of the FPC, work closely with overseas and international authorities, including the Financial Stability Board (FSB), the Basel Committee on Banking Supervision (BCBS), the Committee on Payments and Market Infrastructures and the International Association of Insurance Supervisors.

Through such bodies the Bank promotes the development and adoption of robust international standards, which aim to reduce the likelihood of financial instability by promoting consistent levels of resilience at the global level. The openness of the UK financial sector, the extent of cross-border activity (including the high degree of interconnectedness in market-based finance) and the global nature of many recent shocks, means that many vulnerabilities are most effectively addressed through internationally co-ordinated reforms and robust international standards coupled with effective cross-border co-operation.

Actively contributing to international policy is therefore very important to the Bank’s financial stability objective. For this reason, the FPC continues strongly to support the FSB’s international work programme in this area, alongside working closely with other international bodies and authorities.

In addition to their membership of the FPC, the Governor and Deputy Governor chair key committees at the FSB. For example, the FSB’s Climate Vulnerabilities and Data group is currently chaired by the Deputy Governor for Financial Stability while the Governor chairs the Standing Committee on Supervisory and Regulatory Cooperation.

4: How do FPC rounds work?

The FPC meets multiple times a year, with the dates of the FPC’s policy meetings published in advance on the Bank’s website to provide certainty to market participants. The processes supporting the FPC, including the format of meetings in which members discuss risks to financial stability and possible responses, can evolve over time. But, broadly speaking, each round of FPC meetings typically involve:

• A briefing on key developments in financial markets; global vulnerabilities; risks in the UK household and corporate sectors; and the resilience of UK banks and market-based finance.
• More focused discussions into discrete issues relevant to UK financial stability. These can be longer-term structural changes to the UK economy and financial sector (eg climate change), or topics that directly inform the Committee’s latest risk assessment (eg the results of the Bank’s latest stress test of UK banks).
• A decisions meeting, culminating in decisions about macroprudential policy, including the Committee’s quarterly decision on the UK CCyB rate, and any other policy decisions (eg to make a Recommendation). It also includes a discussion of the key messages and judgements that it wants to convey in its resulting communications.
• Communication of the policy decisions and the deliberations that gave rise to them, and the Committee’s latest view of risks to UK financial stability. Twice a year, the Committee publish a deeper assessment through the Financial Stability Report.

The Committee is supported in its work by staff across the Bank, as well as from the FCA, PRA and HM Treasury. A dedicated FPC Secretariat is responsible for co-ordinating the wide-ranging inputs to the FPC, as well as supporting the FPC’s outputs, including some of its public communications. Figure 3 sets out the cycle of a typical FPC round, with each component part described in more detail below.

4.1: Briefing

FPC members receive regular briefings produced by staff, including analytical work and market and supervisory intelligence. Some of these briefings will be specifically requested by FPC members; shared with the FPC after being produced for another Committee; or delivered on the initiative of staff. The nature of FPC briefings can vary significantly from topic to topic.

At one extreme, Committee members receive short, factual twice-daily reports on the latest developments in markets. These are supplemented with more frequent updates when warranted by market conditions.

At the other extreme, Committee members will receive in-depth reports on specific topics. The most common form of briefing tends to be notes that examine recent economic or financial developments and use analytical techniques or intelligence to answer specific questions, provide more detailed assessment of specific risks, or update the Committee on the impact of previous actions. For example, what are the key risks to UK financial stability arising from an increase in interest rates? Or to what extent is there evidence of exuberance in financial markets?

A substantial proportion of the analytical support for the FPC’s activities comes from staff in the Bank’s Financial Stability, Strategy and Risk Directorate. Market intelligence, supervisory insights and analysis from staff in the Bank’s Markets, International, and Financial Market Infrastructure directorates, the PRA, and FCA, and on occasion HM Treasury, are also critical inputs into the FPC’s activities.

The Bank’s market intelligence (MI) is drawn from an extensive and diverse set of market participants across a range of firms, markets and jurisdictions, and helps the Committee to understand better the qualitative behavioural patterns that underlie quantitative movements in financial variables and to spot new developments or risks that might introduce potential vulnerabilities into parts of the financial system. In addition, supervisory intelligence allows the Committee to draw together granular supervisory insights to form a better understanding of developments across the system as a whole.

A focal point for the round of FPC briefings is a set of presentations from Bank staff to the Committee summarising the key developments since its previous policy decision. The agenda of this meeting varies somewhat each time, but usually includes:

• A summary of the key movements and developments in financial markets given by the Bank’s Markets and/or Financial Stability, Strategy and Risk directorates. For example, developments in the level of credit spreads between high-yield corporate bonds and reference rates, or key risks recently highlighted by MI contacts.
• A presentation on recent developments in global financial stability risks that could potentially impact the UK financial system from the Bank’s International Directorate. For example, assessing potential impacts from a slowdown in the Chinese property market or from a fall in commercial real estate prices in key markets across the world.
• A set of presentations from the Financial Stability, Strategy and Risk Directorate outlining the resilience of UK banks (for example the latest levels of non-performing bank loans), and the UK household and corporate sectors to current risks (for example the latest estimated household debt-servicing ratios and the amount of corporate debt estimated to be maturing in the near term).

This briefing is also usually more detailed in the two quarters a year the FPC publish the FSR, and lighter in the other two rounds, with a greater focus on highlighting any significant changes since the previous FSR.

As part of this briefing, the FPC will consider a wide range of information, alongside economic and financial indicators. No single set of indicators can ever provide a perfect guide to systemic risks, or to appropriate policy responses, due to the complexity of financial interlinkages, the tendency for the financial system to evolve over time and time lags before risks become apparent. The FPC also monitors a specific set of indicators as a core input to the use of the CCyB. These include measures relating to the size, growth and composition of balance sheets within the financial system and among borrowers, and information on terms and conditions in financial markets. They are published in each FSR and on the Bank’s website.^{footnote [12]}

There is some overlap between the briefing received by the FPC and other committees. FPC members who sit on the other committees are able to incorporate the insights that have been provided to them as policy makers into macroprudential policy discussions. In addition, analysis on issues such as credit conditions, the banking system and financial market developments that cut across multiple committees’ interests is produced by staff across the Bank, and circulated jointly. Furthermore, FPC members have the opportunity to observe the briefing session held for the MPC at the beginning of each MPC round, and vice versa. PRC external members can also attend these two briefing meetings.

4.2: Issues discussions

These meetings are a chance for the Committee to have a detailed discussion on an individual risk or policy area. The topics the Committee typically discuss in these meetings can be varied but are usually targeted at allowing the Committee to discuss the degree to which a risk could be systemic, and then, for risks that are judged to be or have the potential to be systemic, discuss whether/how to take action to combat that risk through macroprudential policy responses. Previous examples of Issues discussions include:

• Topics that directly inform the Committee’s current views on the levels of risk and resilience in the UK financial sector, for example the results of the Bank’s latest stress test of the UK banking system, or an assessment of global financial stability risks and their potential to spillover to the UK.
• Topics focused on longer-term structural changes to the UK economy and financial sector. For example, the potential risks and benefits that the wider adoption of certain technologies could cause, or the impacts of long-term changes in key markets (for example, in the provision of credit to UK corporates).
• A deeper assessment on a specific risk and the resilience of the sector to it. For example, the Committee has previously identified a number of vulnerabilities in market-based finance (see Table 5.A in the December 2023 FSR) and keeps abreast of developments in these risks, and actions taken by authorities globally to tackle them.
• An assessment of the impacts of previous policy actions, and accordingly a discussion on whether it is appropriate for the policy to be kept in place, adjusted or removed. For example, the FPC most recently assessed the impact of its mortgage market Recommendations in 2022 and, after consultation, decided to remove one of the measures, considering that a single tool, in conjunction with other FCA rules, ‘ought to deliver the appropriate level of resilience to the UK financial system, but in a simpler, more predictable and more proportionate way’.^{footnote [13]}
• To periodically review a relevant policy framework. For example, the Committee must maintain a framework for setting capital buffer rates for other systemically important financial institutions (‘The O-SII buffer’) that reflects the extent to which the failure or distress of a ring-fenced bank or large building society might pose a risk to the UK financial system. This framework must be reviewed at least every second year.

Issues discussions are supported by a note containing staff briefing, analysis and recommendations which is circulated to the Committee around a week in advance of the meeting. This is taken as read to allow only a short staff presentation to tee up the Committee discussion in the meeting. The FPC Secretariat are responsible for agreeing actions and further work following the meeting.

4.3: Decisions meeting

Policy measures that may be required to mitigate risks to financial stability are discussed and, where appropriate, agreed by the FPC at the Decisions meeting. Often a key form of the FPC’s actions is in what it communicates, so this meeting also represents a chance for the Committee to begin to discuss what it wants to communicate externally. Aside from FPC members, only a few Bank staff are present, including a Secretariat with responsibility for producing the Record of the discussion.

The legislation sets out that the Chair of the FPC – the Governor or, if the Governor is not present, the Bank’s Deputy Governor for Financial Stability – should seek to ensure that decisions of the FPC are reached by consensus wherever possible. Where that is not possible a vote is taken by the Committee (although to date this has not been necessary).

At the Decisions meeting, the FPC also sets the UK CCyB rate, and periodically formally reviews the status of open policy Recommendations or Directions. The Committee assesses actions taken in response and decides whether to withdraw the policy measure – if it has been successfully implemented or is no longer required to mitigate risks to UK financial stability – or to retain it as being in progress. For example, in June 2024, the FPC closed two Recommendations it had made in relation to LDI resilience, given the significant progress made on LDI fund resilience across domestic and international authorities over the previous 18 months.

In seeking to meet its objectives, the FPC must also consider whether any burden or restriction imposed by its actions on a person or on the carrying out of an activity are proportionate to the benefits.^{footnote [14]} Generally, the FPC must also explain its reasons for taking action and provide, where practicable, an estimate of the costs and benefits that would arise from compliance. It must also have regard to the Bank's financial stability strategy and, so far as is possible while complying with its objectives, seek to avoid prejudicing the PRA and FCA’s respective objectives.

Where it judges that publication of any information relating to decisions it has made at a meeting would be against the public interest, the FPC can delay disclosure until such time as it determines it is no longer against the public interest to publish such information.

The Court of the Bank of England has a statutory responsibility to keep the procedures of the FPC under review. Non-Executive Court members observe FPC meetings, and ensure that their conflicts codes are monitored and observed. The Chair of Court also undertakes effectiveness reviews of the Committee. To support this, annual surveys of FPC members are undertaken which are supplemented with individual discussions with all Committee members. The findings of these effectiveness reviews are reported to Court.

5: FPC communications and accountability

The FPC’s policy decisions and its wider assessment on the level of current risks to UK financial stability are communicated in a variety of ways. Any new Directions and/or Recommendations that have been agreed are communicated to those to whom the action falls – for example, the PRA or FCA. Policy decisions are also communicated to the public around 1–2 weeks after the Decisions meeting, in a Record of that meeting – and in the FSR in Q2 and Q4.

Each release contains different elements targeted specifically at different audiences:

• The simplest form of the FPC’s communications are a small number of key messages that provide a brief, digestible and high-level summary of the Committee’s latest deliberations, policy decisions and assessment, designed for a broad audience and published on social media.
• The Financial Policy Summary provides an overall summary of the Committee’s latest judgements and any decisions it has taken.
• The Record of the Decisions meeting is a formal document describing any decisions taken at the meeting and, in relation to each decision, a summary of the Committee’s deliberations. The Record is a statutory requirement under the Act.^{footnote [15]}
• In Q2 and Q4 the FPC publish the FSR. The FSR must include: the FPC’s view of the stability of the UK financial system at the time of the Report’s preparation; an assessment of the developments that have influenced the current position of the UK financial system; the strengths and weaknesses of the UK financial system; risks to the stability of the UK financial system; and the Committee’s view of the outlook for the stability of the UK financial system. It also reports the Committee’s view of progress against previous Recommendations and Directions, as well as reporting any new policy actions taken to reduce and mitigate risks to stability.

The key messages and policy actions in the FSR are conveyed to a wide audience. A press conference is held when the FSR is published, along with other media commitments. Participants in financial markets — including the Bank’s network of market intelligence contacts — are also informed of policy decisions when the FSR is published. FPC members and other Bank staff hold regular meetings with financial market participants where FPC decisions are discussed. And the Bank’s network of Agents across the United Kingdom is able to promulgate and discuss messages with business contacts, often supported by FPC members or other Bank staff.

FPC members also appear regularly before Members of Parliament at Treasury Committee hearings, where they are required to explain their assessment of risks and policy actions. The Bank also provides detailed updates to the Treasury Committee on the FPC’s assessment on particular issues outside of these formal hearings, when circumstances warrant it – for example, during the LDI crisis in 2022 and the Silicon Valley Bank episode in March 2023.^{footnote [16]} The Treasury Committee has also held (re)appointment hearings for members.

FPC members also give regular speeches^{footnote [17]} to set out their own or the Committee’s views on certain topics in more detail. Members also regularly visit different regions through the Bank’s Agents network as an opportunity to set out the FPC’s latest assessment directly to key stakeholders, and to benefit from insights from businesses and citizens in those regions first-hand.

Every three years, the FPC also reviews and publishes its medium-term priorities – these are the initiatives it is prioritising alongside its ongoing assessment of the risk environment. The FPC’s set of medium-term priorities for 2023–26 are summarised at the end of Box A.