Frameworks for Implementing Macroprudential Policy: A Comparative Examination of the Bank of England and the US Financial Stability Oversight Council

Following the most recent global financial crisis, policy makers and economic researchers reached consensus that an effective macro-prudential regulatory mechanism must be established to oversee the buildup of systemic financial risks and to mitigate the risk of future financial crises. Within the Basel III international regulatory framework, countries have started establishing their own regulatory bodies to achieve this task. However, because the financial regulatory structure varies from country to country, there arise different regulatory frameworks in different countries, particularly in the UK and the US, that undertake different approaches to macro-prudential policy supervision.

This Capstone project first provided a critical review of the ways in which professional and academic thinking had evolved regarding macro-prudential policy and an assessment of potential tensions between macro-prudential and monetary policy. The team then examined how the Bank of England (BoE) since 2010 had reorganized itself for macro-prudential, micro-prudential, and monetary policy responsibilities. The team particularly discussed Financial Policy Committee's (FPC) specific macro-prudential endeavors that had been undertaken so far. The project also focused on how the Financial Stability Oversight Council (FSOC) oversees macro-prudential policy development and implementation in the US, and provided a schematic mapping between the BoE institutional framework and the responsibilities of the FSOC stakeholders.

The research shows that monetary and macroprudential policy are interconnected, and macroprudential policies should be the “first line of defense”. Furthermore, coordinating policy actions can increase the effectiveness, and using monetary policy for macroprudential purposes requires strong nominal inflation anchor.  The BoE team found that although the creation of the FPC in the BoE may have mitigated systemic risk in the UK’s financial market, it is still too early to assess its effectiveness. In addition, the unique characteristics of the BoE have contributed to the FPC’s success so far. Lastly, the fragmented financial regulatory system and the less bank-centric characteristic of the financial market in the US make the creation of the FSOC the only optimal way to identify and mitigate systemic risks. And besides its powers, convincing all of the agencies represented on the FSOC that an activity or institution poses a risk to the whole system is critical to its objectives.