UK has been changing the financial system radically. The current authority for financial services is to be abrogated.

I am keeping my promise: I will go on examining under which governance structure macroprudential policies give healthier results. In my commentary dated February 16, I summarized the four options proposed in an important report by the Bank for International Settlements (BIS). The first was to assign the role as a shared responsibility by more than one institution. There were two alternatives under this option: to establish a macroprudential policy council (or a financial stability policy council) or to introduce an arrangement under which macroprudential policy decisions will be taken by multiple agencies. Second was to establish a separate macroprudential agency. The third option was to assign the responsibility of implementing macroprudential policies to the central bank and to establish a separate microprudential regulation agency. The fourth option was to delegate the central bank the authority to carry out both macro and microprudential policies. The current structure in Turkey corresponds to a quite weaker form of the option one, alternative one. I will not repeat why the current system in Turkey is weak since I have done several times before. Today I want to focus on the new regulations the UK initiated in line with option four.

UK has been changing the financial system radically. The current authority for financial services is to be abrogated and replaced by two new authorities: the Prudential Regulation Authority responsible for micro regulations and the Financial Conduct Authority. The first will supervise not only financial institutions but also large and important non-financials. The Authority will function as a unit subsidiary to the Bank of England. Financial markets will be regulated by the second Authority. The interesting part is that, both of the new authorities will be instructed by the Financial Policy Committee, the twin brother of the Board for Monetary Policy.

The Committee is headed by the Governor of the Bank of England and it has ten members. Currently, both of the two deputy governors of the Bank are a member to the Committee, one responsible for monetary stability and the other for financial stability. Another deputy governor to be responsible for prudential regulations will be assigned. In addition, heads of the aforesaid new authorities will become members to the Committee. There also will be members out of the Bank. Another interesting point is that, the Board for Monetary Policy and the new Financial Policy Committee have common members (governor and deputy governors) to ensure the coordination between monetary policy and macroprudential financial policy.

The Financial Policy Committee was established in February 2011 as the Interim Financial Policy Committee. The primary responsibility of the Committee is to share with the government its advice on macroprudential instruments that deems necessary to be implemented. The advised measures will be enacted after public approval. The law will also clarify the objectives of the Committee. In December, the Interim Committee issued a report, which discusses what the scope of macroprudential policy tools should be (the report is accessible on the Bank of England’s website). The Committee will have two main powers: First, it will have the power to call the aforesaid new authorities for implementing a certain microprudential policy and for giving account for not implementing such policy. Second it will have the power to instruct the authorities on the exact terms of a policy practice (for example, it can call the authorities to change the leverage ratio, let say, at a certain rate). The Committee will not deal with individual financial institutions; it will look at the wider system. It can be useful for us to monitor the UK experience.

This commentary was published in Radikal daily on 28.02.2012