Definition of Financial Policy Committee FPC

The Financial Policy Committee (FPC) is the UK’s risk regulator formed in early 2011, charged with overseeing the stability of the financial system. The committee is given tough powers to tame systemic risk by clamping down on loose credit, overheated sectors and previously unregulated parts of the financial system.

The committee, housed in the Bank of England (BoE) and chaired by the Bank's governor Mervyn King, is viewed as a counterpart to the monetary policy committee, which sets interest rates.  The FPC will be part of the BoE and staffed with six BoE executives, the head of the new regulator and four external members.

Whereas the Monetary Policy Committee (MPC) is responsible for making interest rate decisions based on changes in the macroeconomic environment, the FPC is more of a regulatory body for the City. In this regard it signals the end of the previous “tripartite” system of sharing regulatory responsibility between the Bank of England, the Financial Services Authority, and the Treasury.

It comprises internal and external members and has two main tasks. The first is to monitor overall or systemic risks to the financial system (macro-prudential), and the second is to regulate individual groups within it (micro-prudential). In order to do this the FPC is identifying and analysing potential policy instruments.

As a “macro-prudential” regulator, the new committee will focus on financial stability. It will have the power to impose broad policy changes on the Prudential Regulatory Authority, which will regulate individual banks. The body is part of the UK coalition government's regulatory revamp, designed to prevent a repeat of the financial crisis.

Example
The FPC could raise bank capital requirements if it thinks the economy is overheating, or place loan-to-value limits on mortgages. It could also limit overall bank borrowing or control specific kinds of lending by imposing higher collateral requirements, called “haircuts”. [1]

One of the tools proposed for the FPC comes directly out of the global Basel III bank reform package. The so-called “counter-cyclical buffer” allows national regulators who are worried about an overheating economy to require local banks to hold extra capital. Regulators in other countries are then expected to require their local banks to hold extra capital against any business they do in the overheating country. [2]

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