Regulation and Monetary Policy Flashcards
Bank of England functions
-Maintaining price and macroeconomic stability
-Maintaining financial stability in monetary system
-Controlling issue of physical currency (notes and coins)
-Buying/selling currency to support the exchange rate
-Liaising with other Central banks
Quantitative easing
QE affects money supply. It doesn’t mean printing more money but the bank puts more money into circulation by buying assets (government and corporate bonds). The seller gets cash and the bank gets assets.
How does QE stimulate economic growth?
-Sellers should have more cash and are likely to spend more
-This spending increases asset prices, making people wealthier and more likely to spend
-When market price goes up, yield goes down so borrowing costs goes down so more likely to spend
-The extra cash in circulation ends up in banks, making them more likely to lend, fuelling consumption or investment
The Funding for Lending Scheme (FLS)
The bank used the FLS as a targeted means to get commercial banks lending. Banks were able to borrow cheaply from the BoE for this purpose. FLS is judged as unsuccessful at stimulating business growth as much of the lending went to mortgages.
Bank Regulation
The government aided the creation of the MPC at the BoE and the FSA (Financial Services Authority) as an external regulator of the banking/financial system.
Financial services act (2012)
Created 2 new regulation authorities; the Prudential Regulation Authority (PRA) and the Financial Policy Committee (FPC) at the BoE. Also created the Financial Conduct Authority (FCA) which is independent of the bank.
Micro prudential regulation
Identifying, monitoring and seeking to remove/manage risks that affect individual banks and other financial institutions.
Macro prudential regulation
Identifying, monitoring and seeking to remove/manage risks that affect the financial system as a whole
What does the Financial Policy Committee do?
Publishes a report twice a year (the financial stability report) which identifies key threats to the stability of the UK financial system. (BoE/Macro)
What does the Prudential Regulation Authority do?
Sets standards for banks, building societies, insurance companies etc. Can require individual firms to maintain specific capital reserves / liquidity ratios (BoE/Micro)
What does the Financial Conduct Authority do?
Aims to protect consumers by imposing regulations on firms (including banks), protect financial markets and promote effective competition in the financial sector.
Moral Hazard
The idea that people will act differently if they know they will not bear the full consequence of their actions. In context, the BoE is a lender of last resort and the Treasury bails out banks so they do not fail, so banks took bigger risks.
Bank failure
A bank can fail if it becomes insolvent or doesn’t have sufficient liquidity. Insolvency means that the banks liabilities is greater than their assets. Insufficient liquidity means that a bank doesn’t have enough cash to meet its day-to-day needs.
