The Macro-Prudential Authority: Powers, Scope and Accountability

Neither the achievement of price stability, via the Monetary Policy Committee (MPC), nor the application of micro-prudential oversight, via the Financial Services Authority (FSA), led to overall financial stability. There is a gap that needs to be filled by a macro-prudential authority (M-PA), the Financial Policy Committee (FPC) in the United Kingdom. The only macro-prudential instrument used heretofore has been the publication of Financial Stability Reviews (FSR). While worthy, these have been ineffective. The M-PA should have the following powers: First, the power to alter the composition of Central Bank (CB) assets, by adding to (subtracting from) its holdings of claims on the private sector. The argument that such actions are ‘quasi-fiscal’, and should therefore not be undertaken, is not supported. Second, the power to adjust margins (Capital adequacy ratios, liquidity ratios, loan-to-value ratios, etc.) to influence the conduct of financial intermediation. The argument that the use of such powers puts the FPC in a difficult conflict with the Monetary Policy Committee (MPC) is not supported...