Background
The Financial Policy Committee (FPC) is a crucial entity within the UK’s financial architecture, established to oversee and address risks that could undermine the stability of the financial system. Its role is preventative and proactive, aiming to ensure that the financial system remains robust in both conventional and adverse conditions.
Historical Context
The FPC was established in 2013 as part of the UK’s response to the global financial crisis of 2007-2008. Recognizing the need for a stronger regulatory framework to prevent future systemic risks, the Bank of England introduced the FPC as the macroprudential authority. This committee operates independently but in close coordination with other financial regulatory bodies.
Definitions and Concepts
The most essential concepts related to the FPC include systemic risk (the potential for a disruption in financial services that could lead to widespread economic damage), macroprudential regulation (the oversight that aims at maintaining the stability of the financial system as a whole), and resilience (the ability of the financial system to withstand and recover from shocks).
Major Analytical Frameworks
Classical Economics
In Classical Economics, the concept of financial regulation is less emphasized, as it primarily focuses on the self-regulating nature of markets. Classical economists tend to favor minimal government intervention.
Neoclassical Economics
Neoclassical economics builds on the classical view but incorporates some room for intervention when market failures occur. Neoclassical theorists might see the FPC’s role as necessary to correct market imperfections contributing to systemic risk.
Keynesian Economics
From a Keynesian perspective, regulatory bodies like the FPC are pivotal. Keynesian economists argue that proactive government and institutional intervention are necessary to ensure economic stability and growth.
Marxian Economics
Marxian economists might view the FPC skeptically, seeing it as a mechanism to uphold the existing financial system, which they argue is structured to benefit capitalist interests at the expense of broader societal wellbeing.
Institutional Economics
Institutional economists would emphasize the role of institutions like the FPC in shaping economic outcomes. They would regard the establishment and actions of the FPC as a critical element in managing systemic risk.
Behavioral Economics
Behavioral economists might analyze how the FPC accounts for psychological factors and irrational behaviors within financial markets. They could see the committee’s work as mitigating not just logical but also emotional and cognitive risks.
Post-Keynesian Economics
Post-Keynesian perspectives would likely support robust financial regulation and oversight, arguing that the FPC’s interventions are essential to manage inherent instabilities in a dynamic financial system.
Austrian Economics
Austrian economists generally argue against proactive financial regulation. They might see the FPC as an external interference that could potentially distort natural market processes and thus introduce new risks.
Development Economics
From a development economics perspective, the strength and effectiveness of the FPC could be crucial to ensuring stable financial environments conducive to economic growth and development.
Monetarism
Monetarists would focus on how the FPC’s actions influence the money supply and overall economic stability. They might support the committee insofar as it helps prevent inflation and ensures monetary stability.
Comparative Analysis
The FPC’s function can be compared with similar institutions worldwide, such as the Financial Stability Oversight Council in the United States, which also aims to identify and mitigate systemic risks in financial markets.
Case Studies
Investigations into the effectiveness of the FPC might include analyses of its handling of volatile market conditions, such as Brexit, and its responses to global financial turbulences.
Suggested Books for Further Studies
- Financial Regulation: Why, How and Where Now? by Charles Goodhart
- The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin
- Too Big to Fail by Andrew Ross Sorkin
- Fragile by Design: The Political Origins of Banking Crises and Scarce Credit by Charles W. Calomiris and Stephen H. Haber
- The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig
Related Terms with Definitions
- Systemic Risk: The risk of collapse of an entire financial system or market, as opposed to the risk associated with any one individual entity.
- Macroprudential Regulation: Oversight and regulatory practices aimed at ensuring the stability and resilience of the financial system as a whole.
- Financial Conduct Authority (FCA): A financial regulatory body in the UK overseeing individuals providing financial services.
- Prudential Regulation Authority (PRA): A part of the Bank of England responsible for the prudential regulation and supervision of banks, building societies,
