Financial stability

Our mission

We’re the central bank of the UK. It’s our job to make sure the UK has a stable financial system. A stable financial system is one that can provide crucial services to households and businesses in both good times and bad.

People use the financial system to pay, save, borrow or invest. They rely on its services every day. Our economy wouldn’t be able to work without it. You can read more in our guide on What is financial stability?

We work to maintain and improve the stability of the UK’s financial system in several ways. Two statutory bodies lead much of this work.

These are our:

• Financial Policy Committee,which identifies, monitors and takes action to remove or reduce systemic risks to the UK’s financial system
• Prudential Regulation Authority, which supervises around 1,500 individual financial institutions including banks and insurance companies

We also have statutory responsibilities to:

• supervise financial market infrastructures (FMIs), which are a vital part of the UK’s financial system and wider economy
• act as the UK’s resolution authority so, if a bank fails, that happens in an orderly way and disruption of vital services is minimised

We set out our strategy for maintaining Financial Stability every three years.

Financial Stability Strategy

Financial Policy Committee

The Financial Policy Committee (FPC) leads our work on financial stability. It identifies and monitors risks that threaten the resilience of the UK financial system as a whole. It also has power to take action to counter those risks. An example of such a risk is unsustainable levels of debt and credit growth.

The FPC also has a secondary objective to support the economic policy of the Government. At least once a year, the Chancellor makes recommendations about the FPC’s responsibilities for financial stability and also about the Government’s growth and employment objectives. These are set out in a remit letter.

Why and when was the FPC created?

The 2008 global financial crisis showed how important financial stability is. At that time, the Government had to ‘bail out’ some banks to protect the UK’s financial stability. This exposed a gap in the oversight of the financial system as a whole, and policymakers recognised that focusing on supervising individual banks was not enough.

The FPC was created in 2011. In contrast to the Prudential Regulation Authority (PRA) – which looks at the safety and soundness of individual institutions – the FPC works to make sure the UK financial system as a whole is safe and sound.

Who is on the FPC?

The committee is made up of 13 people. Six of them are Bank of England staff: the Governor, four Deputy Governors and the Executive Director for Financial Stability Strategy and Risk. There are also five external members who are selected for their experience and expertise in financial services. The committee also includes the Chief Executive of the Financial Conduct Authority and one non-voting member from HM Treasury.

Having a mix of internal and external committee members brings a wider range of skills and experience to the committee’s work. It helps to give the committee a better understanding of any risks and it helps them to find effective solutions.

Find out more about the members of the committee.

How often does it meet and how does it communicate?

The committee usually meets four times a year. We publish these meeting dates in advance. After each meeting, we publish the FPC’s views of the risks to the UK’s financial system and how to tackle those risks in a Summary and Record.

Twice a year (in Q2 and Q4) we also produce a more detailed Financial Stability Report. The Financial Stability Report sets out the FPC’s view on the stability of the UK financial system and what it is doing to remove or reduce any risks to it.

• Read our Financial Stability Report publications

The Financial Stability in Focus publication complements the Financial Stability Report and sets out the FPC’s view on specific topics related to financial stability.

• Read our Financial Stability in Focus publications

What powers does the FPC have?

If the Financial Policy Committee identifies a potential risk, it has the power to act. It can use its power of direction or its power of recommendation.

Its directions are binding instructions it can give to the Prudential Regulation Authority (PRA) and Financial Conduct Authority. The FPC can issue a direction to the PRA to make banks, building societies and large investment firms carry out certain actions.

For banks, this includes powers to set capital requirements (i.e. to change the financial resources they have that act as a cushion against unexpected losses). You can read more about capital in our guide on What is Capital?

The FPC can also make recommendations. It can make recommendations on a ‘comply or explain’ basis to the PRA and to the FCA. This means that if the regulators decide not to implement a comply-or-explain recommendation, they must explain publicly their reasons.

For example, the FPC uses it recommendation power to restrict the proportion of risky mortgages banks take on. The FPC can also make general recommendations to other bodies.

The FPC publishes policy statements for each of its powers of direction to explain how it plans to use them and why.

How we maintain financial stability

We work in several ways to identify and deal with risks from and to all parts of the financial system.

Countercyclical capital buffer (CCyB)

Since the 2008 global financial crisis, we have made UK banks and building societies increase the financial resources (capital) they have set aside to act as a shock absorber for bad times. The countercyclical capital buffer (CCyB) is one such tool which enables the FPC to adjust the resilience of the UK banking system to the changing risks it faces over time.

The FPC sets the level of the UK CCyB rate. If the Committee thinks risks are growing, it sets a higher UK CCyB rate. This means that banks are required to have an additional cushion of capital to absorb potential losses, enhancing their resilience and contributing to a stable financial system.

Then, if those risks materialise, the FPC can let banks use this extra capital they have set aside, which helps them keep lending to households and businesses even in bad times.

• Read more about the countercyclical capital buffer

Stress testing

Each year we ‘stress test’ the UK’s largest banks, building societies and insurers to see if they are prepared for an economic crisis. Read more about our stress tests.

Limiting risky mortgages

The FPC uses it recommendation power to restrict the proportion of risky mortgages banks take on. This helps us to reduce the risks to the financial system from high levels of household debt, particularly if the economy suffers a downturn.

For example, we have put a limit on the amount of new mortgages that lenders can approve that are 4.5 times or more the size of a borrower’s income.

Resolution

The Bank of England is the UK’s resolution authority. If a bank fails, we make sure that happens in an orderly way. So disruption to any of its vital services is minimised. Read more about our work on resolution.

Supervising financial market infrastructures

Financial market infrastructures, such as payment settlement systems and central counterparties, play a key role in keeping the economy moving. The Bank of England is responsible for overseeing these important services. Read more about our work on supervising financial market infrastructures.

Ensuring financial sector resilience

The three UK financial authorities – the Bank of England, HM Treasury and the Financial Conduct Authority – work together to make sure the UK financial sector runs smoothly, efficiently and effectively.

Read more out what we do to make sure the UK’s financial sector is resilient to any disruptions to its operations.