The political independence of the Financial Policy Committee (FPC) must be strengthened to avoid ‘group think’. Ahead of the Committee’s first quarterly meeting next year, leading think tank Policy Exchange has published a paper recommending that the majority of the thirteen members that make up the FPC should be externally appointed and each individual approved by the Treasury Select Committee.
The paper – Financial Policy, Monetary Policy and Macroprudential Regulation – notes that only four out of thirteen members of the FPC’s interim committee (including two non-voting members) are external appointments. All members of the committee are appointed by the Chancellor. The paper suggests that the majority of members should be externally appointed and should have a background in financial markets. It also suggests that the Treasury representative sitting on the committee should be removed and that the Treasury Select Committee should be able to veto any appointments to reinforce the FPC’s procedural and political independence.
The paper also criticises the ‘one-size-fits-all’ capital requirements set out under the Independent Commission on Banking’s report earlier in the year. It notes that capital buffers failed to stop the financial crisis – both Lehmann Brothers and Northern Rock had around 11% at the point of collapse. Instead of increasing the size of the buffer which could reduce lending, the paper says that the Bank of England should be able to mandate differing capital requirements related to the riskiness of a firm’s balance sheet to allow more flexibility.
Mark Darrell-Brown, co-author of the report, said, “The Financial Policy Committee should be the Bank of England’s early warning alarm, spotting any dangers in the UK’s financial system to prevent a repeat of the 2008 crisis. It should act as a channel of communication between the Bank and the markets, and challenge current conventional wisdom.
“It is therefore absolutely critical that the new macro-prudential regulator avoids ‘group think’. That means strengthening the Committee’s panel of experts to include a majority of external appointments with a strong background in financial markets.”