Uk Regulatory Framework

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Regulatory framework in the UK

As a committee operated by the Bank of England (the Bank), the FPC is in charge of macro-prudential supervision, and has powers of recommendation to ‘twin peaks’ – PRA (in charge of micro-prudential) and FCA (in charge of consumer protection) to address systemic risks. (H.M. Treasury, 2011)

Rationales for the regulation of the near-term risks raised by the referendum

the UK’s regulation of the financial services industry reflects the need of protecting the public interest in a robust and stable financial system. (Moloney, 2016)

Achieve the UK regulatory objectives as follows: (a) Sustaining market confidence in the UK financial system; (b) Promoting the protection and advancement of the financial stability
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This recalibration aimed to ensure that the leverage ratio would not act as a barrier to the effective measures that could increase the Bank’s reserves. (Brush, 2016)

The FPC adjusted the countercyclical capital buffers - Ensuring that banks raise more capital in the ‘boom period’ so that they will be well-prepared for absorbing losses during the ‘hard time’, which also has the impact on tempering lending during the good time and so restraining the effect of the credit cycle. (H.M. Treasury, 2011)

the Bank enhanced financial stability by acting as a 'backstop ' provider of liquidity insurance to UK banks through its Sterling Monetary Framework (SMF) (e.g. providing the indexed Long-term Repos) to exchange less liquid for more liquid assets. (Winters, 2012)

In case of currency market tension, the Bank holds weekly auctions of U.S. dollars and has agreements with the other central banks to use swap lines. (Milliken and Graham,
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Both two crises increased uncertainty in financial market as well as led to a lack of liquidity and a sharp fall of sterling exchange rate. The Bank, however, was better prepared than last time – early warnings and sufficient capital and liquidity buffers. (Dimsdale, 2009)

Researchers of the Federal Reserve indicated that countercyclical capital buffer has limitations – as a tool against the financial risks, it focused on the whole balance sheet of banks rather than a specific type of lending. For example, the Bank did not particularly target lending for commercial real estate market (CRE) when it eased the capital requirement, even though the CRE was the main object of supervision. (Creighton and Tracy, 2016)

The Bank’s first buying back bonds on 09/08/2016 failed to attract enough sellers, falling short by 52 million, which then cause premium on bonds. This unexpected failure led to a sudden slump in bond yields - yields on 20-year gilts fell sharply to around 1.2% (Chart1), while those on 30-year gilts decreased to about 1.3% (Chart 2). Additionally, the decline of yields added pressure to the pension deficit. (Treanor and Elliott,

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