Building trust in macroprudential policy − speech by Colette Bowe

Speech

I am delighted to be here today to speak to you. Maxwell Fry was a near contemporary of mine, although our paths did not cross when we were students. And some of the previous lecturers in this series are or have been colleagues. So I am both pleased and honoured to be here. And I am grateful to the team at the Business School for this invitation.

I am, as my title implies, going to talk about trust and in particular, trust in macroprudential policy. So, I will begin by sketching out the foundations of modern “macro pru” as it is known for short in this country. I will discuss some of the major challenges we face, or have faced. And I will touch on the question of how we can assess the success, or otherwise, of a set of policy instruments whose objectives is to ensure that the financial system is resilient to a range of threats it could face – whatever they may be.

This is not a problem unique to financial policy authorities, of course – significant parts of the apparatus of a modern state are devoted to doing precisely this.

But because of the financial crisis of 2008, which lives on in the experience and attitudes of many of our fellow citizens, my contention in this lecture will be that making the workings of this part of the system of financial regulation intelligible is of particular importance. And is crucial to enabling our fellow citizens, domestic and international businesses and investors to judge if we are trustworthy. So my objective here tonight is to contribute to this building trust objective by setting out some of the key tools of macroprudential policy, and explaining their impact.

To help frame the purpose of our instruments, I will reference the work of the great philosopher Onora O’Neill, who delivered the Reith lectures on this topic at the beginning of this century. I will have more to say about her ground-breaking work on “trustworthiness” a little later.

The global importance of the UK financial system means the actions of the UK authorities contribute to both domestic and international financial stability. The UK is a leading international financial centre, with a financial services industry that is, by asset size, around five times its GDP^{footnote [1]}. It is therefore, obviously enough, exposed to shocks from abroad^{footnote [2]}. And because the global financial system is highly interconnected means that the UK’s institutions and markets must be a source of strength for the global system and be able to be relied on by others. Standards of resilience must reflect this.

The emergence and development of macro pru in the UK and elsewhere

The Financial Policy Committee, or FPC for short, was established in 2013 in the UK as part of the new system of regulation brought in to improve financial stability and promote confidence in the financial system after the financial crisis. It took some time to develop prior to 2013, and as it is based in statute, it had to pass through parliament.

The FPC leads the Bank’s work and strategy on financial stability. Its primary objective^{footnote [3]} is to identify, monitor and to take action to threats to the resilience of the UK financial system as a whole. A very recent example of this, which I’m sure you are familiar, is the Bank’s temporary and targeted intervention to restore market functioning in long-dated government bonds, announced on 28 September. This intervention was developed to reduce risks from contagion to credit conditions for UK households and businesses. Recognising the risks, the FPC recommended the Bank to take action and was engaged ahead of its launch. And as you will have seen, the fact that it was addressed to financial stability issues, was very much at the forefront of the explanation of the basis of the intervention.^{footnote [4]} So this is a prime example of the FPC’s work and how we engage with other arms of the Bank to meet its financial stability mandate. In the period following the mini-budget, markets saw significant repricing of long-term UK government debt. Our role was to prevent the dysfunction in the market to continue or worsen to a point that would pose a material risk to UK financial stability that would have led to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.

I am one of 5 external members of the FPC. External members are appointed based on their experience and expertise. My own background is a mix of both public and private sector. Our purpose is to provide challenge to the Committee’s executive members (Governor, Deputy Governors, and Executive Director) and add diversity of experience and skills to better understand threats to financial system and come up with appropriate solutions.

This institutional framework has come about as a result of the global financial crisis (GFC) and the flaws that were identified in the policy approach during the so-called “Great Moderation” which saw a sustained period of good economic performance from the early 1990s up the GFC. During this period, central banks increasingly adopted a narrow focus on inflation targeting. This was an important development, which contributed to a sustained period of relative price stability across major economies. However, the excessive focus on price stability contributed, I believe, to a neglect of financial stability over that period which the GFC exposed. Setting the benchmark interest rate may have been enough to ensure an extended period of low inflation, but it could not ensure on its own that market functioned efficiently and effectively. Similarly, while supervisors monitored individual institutions, no one in those authorities maintained a view of the financial system as a whole, or supervised how the interactions between different institutions might enhance shocks to the system.

Macroprudential policy emerged after the financial crisis with the aim of filling this gap. In contrast to microprudential policy (for example, ensuring the safety of an individual bank), macroprudential policy seeks to address risks arising from interactions between and intertwinement of both individual institutions and between the financial system and the real economy. In other words, these are policies designed to ensure financial stability.

I will turn to the successes and failures of macroprudential policy later in this speech, but if nothing else, its spread across the globe has been astounding.

Recent work by Rochelle Edge and Nellie Liang, colleagues at the Federal Reserve Board and US Treasury respectively, looks at the way central banks across the world have implemented macroprudential policy governance since the financial crisis. They note that a large number of countries, including the UK, created financial stability committees in the aftermath of the GFC to ensure clarity of purpose and accountability for new tools. Edge and Liang note that while there were only 11 financial policy committees worldwide in 2008, there were 47 ten years later. One quarter of these have the power to take or recommend concrete policy actions, and the ministry of finance is a member of the committee in 40 of those 47.^{footnote [5]}

How might these committees, and their policies, nurture a sense of trust and trustworthiness? First, having a clear and robust governance process fosters a sense of trust in the policies said committee implements on its own. FPC appointments are by appointment by the Government, the Chancellor sets our Remit, and our performance against our objectives is scrutinised by parliament. Second, most of these committees, including the FPC in the UK, publish Financial Stability reports, or equivalents, allowing them to explain their policy decisions, the reasoning behind them and the risks they see looming on the horizon. This, I hope, also fosters trust in the decisions and confidence among the public.

Finally, much like inflation targeting several decades ago, having an independent macroprudential regulator has evolved into something like an international norm for what is considered part of an appropriate central banking framework. Having an independent macroprudential regulator adds to the credibility and accountability of the economic policy framework of our economy. Without one, I am not clear we would enjoy the same confidence with international investors. As such, while the global spread of macroprudential policy has come with new tools and new governance structures domestically, it has also brought with it new responsibilities for central banks that wish to remain credible in the eyes of both their domestic audience and the market.

That being said, the financial system continues to evolve, and macroprudential policy cannot stand still in the face of this continued change. One area in which this is particularly true, as we have very recently seen, is non-bank financial institutions (NBFIs), which are of increasing importance to the financial system and to financial stability. This cohort comprises a broad range of institutions that support the provision of lending to the real economy without holding banking licenses or face prudential regulation in the way a bank would: think of pension funds, for example, or hedge funds, or money market funds.

Their importance continues to grow. In the US, credit-to-GDP from non-banks grew from roughly 30% of GDP to about 70% as of 2021^{footnote [6]}. In the UK, they have grown markedly as well; for example, pension funds’ share of UK financial system assets rose from 5% to 11% between 2009 and 2021. Overall, in 2021, NBFIs held 50% of total UK financial system assets. They are important providers of credit to the real economy.

However, the macroprudential toolkit for non-banks is less structured than it is for banks. Expanding the ways in which macroprudential policies address non-banks is and will remain an important priority for the FPC.

Public understanding of Macroprudential policy and the building of trust

I am now going to say a few words about how, in my view, increased public understanding of macro pru is linked to, and essential to, the task to build trust. In doing so I am going to have to shorthand, no doubt rather inelegantly, some particularly important work that the philosopher Onora O Neill set out in her Reith Lectures in 2002.

She emphasised the crucial point that we cannot just demand or require to be trusted in any field of endeavour, be it personal or not. We have to be worthy of trust to carry out particular functions, or to behave in particular ways. So saying that “we want to be trusted “is not enough – we must be able to show that we are worthy of trust.

So how can we do this in the complex world of macro pru policy? The answer is, I propose, that we have to be able to demonstrate to our fellow citizens what we are doing and why we are doing it. And with what effect.

And we have to be able to do it in ways that are intelligible – there is no point in saying: “we are trustworthy”, if no one except for professionals in the markets can understand what we are talking about.

O’Neill also outlines the need for “serious and effective accountability”, and how this needs to be founded on a bedrock of good governance, and “obligations to tell the truth and needs to seek intelligent accountability”. The FPC is ultimately accountable to the public given that all appointments to the Committee are subject to approval by the Chancellor and scrutiny by the Treasury Select Committee (TSC). Moreover, each year, the Chancellor confirms the remit of the FPC and recommendations for the year ahead, and members of the Committee are regularly called to provide evidence to the TSC. I and my fellow members are also active in outreach events. These include visits to firms, community forums, citizens panels, and speeches, to engage with members of the public, not just to get our message across to them, but to listen and understand their concerns. I strongly feel that these efforts reinforce institutional credibility, integrity and earn the trust from the public, whose interests we are serving.

So this is the challenge that we face if we are to be worthy of the trust that we want to inspire in our fellow citizens.

We must be able to explain what we are doing, why we are doing it – and if need be, what are the costs, as well as the benefits.

This is not a straightforward task. But I contend that it has to be done. And not once off, but continuously. The collapse of trust in financial institutions and indeed in the authorities after 2008 was of immense importance for our democracy. The rebuilding of that trust requires us to be able to demonstrate, intelligibly, that we are worthy of it.

GDP-at-Risk

A key challenge with building trust and accountability is that the primary objective of macroprudential policy in the UK – financial stability – is most easily defined in its absence. It is the opposite of the financial instability of recessions, crises, and panics. Risks to financial stability are not directly observable. And often interventions can be felt today - but their benefits may be realised far into the future. Consequently, the potential bad outcomes that macroprudential policies seek to prevent have to be estimated^{footnote [7]}. All of which makes the job of explaining the purposes of an organisation like the FPC somewhat difficult.

One tool we can use to estimate the success of policies is through the concept of
GDP-at-Risk. GDP-at-Risk seeks to measure the size of potentially large, but unlikely, GDP contractions. The bad outcomes that you might be concerned about as a macroprudential policy maker. On a probability distribution of possible GDP outturns, these are the rarer outcomes on the left tail of the curve – the “tail risks”. GDP-at-Risk can therefore be thought as a summary measure for the overall level of macroeconomic risk.

The goal of the FPC is not to reduce GDP-at-Risk at all costs: its objectives also include taking actions to actively promote productive finance and growth as long as these actions do not compromise the primary objective of financial stability. In other words, shifting the entire distribution of possible GDP outcomes to the right. The FPC can therefore face trade-offs between short term growth and financial stability. The relative weight a policy maker places on these objectives is not necessarily linear; the marginal gains from taking action to protect financial stability grow as GDP-at-Risk increases, while the marginal costs could increase with the size of the intervention.

To get at GDP-at-Risk we use statistical tools to estimate an empirical distribution of future real GDP growth as a function of current financial and economic conditions. The models we estimate then allow us to ask which variables matter for the level and drivers of tail risks in the economy over time, as well as across time horizons. Researchers across the world are refining these tools given they are perhaps the best simple indicator of what macroprudential regimes are trying to achieve^{footnote [8]}.

Here at the Bank, recent work from research colleagues highlights the crucial role of foreign vulnerabilities in determining downside risks to domestic growth^{footnote [9]}. This is particularly relevant for the UK given that it is an open economy and as an international financial centre, so its unsurprising that this has been a particular focus of our research. Downturns abroad can bring about downturns at home: this can be through a range of channels^{footnote [10]} such as reduced demand to UK exports, or UK banks making losses on their foreign assets and so cutting back on their lending here to try to make up for it, or making investors more risk averse raising the cost of funding for UK firms. The addition of foreign variables into our GDP-at-Risk model means that we can better understand how important these foreign vulnerabilities are in contributing to potential bad outcomes for UK growth.

One of the key benefits of the GDP-at-Risk model is its ability to “weigh up” the impact of various indicators to provide an overall top-down estimate of macroeconomic tail risk. For example, growth at risk measures are regularly shown in the IMF’s Global Financial Stability Report now. Changes in GDP-at-Risk can help to communicate the rationales for macroprudential policies.

Doing so can help to justify the range of tools used by the FPC; I’ll go on to discuss these in more detail next. At first glance the menu of policies may appear disparate and unconnected. But every action is consistent with the FPC’s objective of reducing GDP-at-Risk without an undue impact on the central GDP forecast. This ensures that: (i) the financial system is strong enough to continue lending to households and businesses when shocks occur; and (ii) downturns are not made worse because of unsustainable debt burdens, and the financial system supports the economy.

Of course, there are caveats to this framework. GDP-at-Risk tools should be viewed as one input into an overall assessment of the UK risk environment, and we complement that assessment with other analysis and judgement. As is inherent in most econometric work, the model relies on empirical estimates of historical relationships – so to rely solely on this tool, as helpful as it is, risks fighting the last war. But the GDP-at-Risk model provides a useful jumping off point and a helpful organising framework for weighing up the impact of different vulnerabilities on the overall risk assessment.

Further empirical work is underway to assess the impact of macroprudential policies at enhancing financial stability through the prevention and mitigation of crisis risk. The GDP-at-Risk concept captures the concept of near-term costs and long-term benefits well. It is therefore potentially a useful summary measure of success of the FPC’s policies; I will also touch on this more later.

The FPC’s macroprudential toolkit

As we highlighted in the July Financial Stability Report (FSR)^{footnote [11]}, the UK and global economic outlook had deteriorated and, reflecting developments, financial markets had been volatile. Since then, the UK and global economic outlook has deteriorated further and financial conditions have tightened, with fears of a 2008 style financial crisis making headlines recently. A key difference between 2008 and now is the macroprudential tools that have been used by the FPC to safeguard financial stability and prevent economic downturns turning into financial crises.

Mortgage market tools

The housing market is a particular area in which financial stability risks to the economy can arise. The GFC brought into sharp relief the severe consequences that the collapse of credit-fuelled asset price bubbles can have. Housing booms, when underpinned by risky mortgage debt, proved to be no exception.

The FPC’s loan-to-income (LTI) tool limits the number of new mortgage loans by banks that are high relative to income^{footnote [12]}. Individual borrowers may be keen to stretch themselves financially to buy a bigger house, expecting their earnings to grow or house prices to rise. And individual lenders may be happy to provide a larger loan to receive more income. But should a recession hit, not only will we see defaults, but overstretched borrowers will reduce their spending as they struggle to pay their mortgages. And this reduction would ultimately spillover to the rest of the economy, making it harder for businesses (who are no longer getting the same income) to pay their bills - making the economic downturn worse.

Macroprudential policy takes these spillovers into account. By ensuring borrowers in aggregate are not overstretching themselves and financial institutions in general are lending responsibly, macroprudential regulators can ensure that the whole system is more resilient to shocks. This policy might create costs to the individual borrower (a smaller house) and the lender (lower income) in order to provide the overall benefit of financial stability.

The vast majority of macroprudential authorities in advanced economies have introduced policies to tackle financial stability risks to the real economy arising from the housing market. Other authorities use policies such as loan-to-value tools which are calibrated through the cycle, otherwise they can become pro-cyclical. In contrast, the FPC regards their tools as structural, and intended to serve as guardrails through the cycle; however the tools and the purpose they serve remain under review. For example, following a consultation earlier this year, the FPC withdrew its affordability test^{footnote [13]}. This ensured that FPC's tools serve their purpose in a proportionate manner, in the best interests of households and the financial system.

Tools for UK Banks: the ACS and the CCyB

Since the financial crisis, stress testing has rapidly evolved and grown in importance for policymakers. Concurrent stress testing of the UK banking system was first conducted in 2014 and since then it has become the primary way for the Bank of England to assess the health of the banking system collectively and the main institutions within it individually. It allows the FPC to make the critical assessment of the capital adequacy of the banking system as a whole, and its ability to continue to lend to UK households and businesses during a severe economic stress.

Stress tests do not garner the same attention from the media or anticipation from the markets as they did when they were launched following the GFC, and some have called for it to be reconfigured to focus on identifying specific vulnerabilities or a range of threats that the financial system is most vulnerable to. But I feel that the Bank’s regular cyclical scenario (ACS) is an especially useful exercise in disciplining ourselves to ask fundamental questions of the overarching resilience of the core financial system. It therefore serves a key role externally as an accountability device and a way to enhance public confidence in the health of the banking system, and trust in macroprudential policy.

The ACS is also integrated into the broader capital framework and informs the size of the largest banks’ capital buffers^{footnote [14]}. This supports the broader countercyclical nature of our capital framework – as risks in the financial system increase, the scenario becomes more severe and buffers should increase. These buffers can then be used, allowing banks to absorb losses and keep lending. When the system is hit with a large shock, and banks need to use this cushion, the FPC can reduce the countercyclical capital buffer (CCyB) as it did with Brexit and Covid. The intention is to prevent the banking system from amplifying the shock by restricting lending on a perceived need to defend capital ratios rather than on borrowers’ characteristics.

Most countries are similar to the UK on this overarching objective of the CCyB, and the types of shocks and vulnerabilities. In the UK, a plausible consequence of the CCyB is that it might restrain credit growth, however this is not usually a primary objective guiding its setting. Some countries are more specific in their secondary objectives for the CCyB and credit growth. The FPC’s approach lies somewhere in the middle of the international spectrum, with Sweden at one end where CCyB increases are explicitly not designed to restrict credit growth in upswings, and at the other end being Hong Kong’s approach where dampening excess credit growth is a “major and immediate objective” of building the CCyB.

The international comparison is important as it reveals a divergence in application, which highlights that the same macroprudential tool can be utilised in different ways to achieve the best financial stability outcome for each jurisdiction. It is clear that there is not a one-size-fits all approach, and it is important that regulators apply the tools judiciously and with the specific vulnerabilities of the financial system it is responsible for in mind. For the FPC to do otherwise, would be irresponsible and risk undermining the efforts to build trust in its objectives to support the UK financial system, households, and businesses.

How to judge the success of policies devoted to preventing things from happening

I’ve already discussed some of the difficulties in quantifying the costs and benefits of our policies earlier when I spoke about GDP-at-Risk. But in order to foster trust in our choices, it is important we devote effort and attention to doing so, and being frank about the merits, shortcomings, and impacts – hypothetical as they might be – of our chosen policies. And in fact, the FPC’s remit requires us to conduct and publish, whenever possible, a cost-benefit analysis of our policy decisions: this is intended to underpin the legitimacy of our actions, and guide their optimal calibration.

A best practice CBA consists of a number of key steps, which I will outline briefly. First, we identify an underlying market failure, which means either addressing an externality that may lead to a build-up of risk or building resilience to a potential crystallisation of risk. We ground our actions in something clear and specific.

Second, we articulate the transmission channels through which we expect a policy to have an impact by considering various scenarios, allowing us to map its effects across different intermediate variables in different states of the world and at different points in time. For example, the FPC’s 2019 Housing Review^{footnote [15]} estimated the effect of the housing tools through their impact on mortgage approvals and household debt in normal times and during a housing boom (followed by recession). Generally, these intermediate variables are mapped onto the common unit of GDP, giving us quantified estimates of costs and benefits.

Finally, we make a number of assumptions about how we should weigh and net these costs and benefits – and it is these assumptions that are crucial. For one, we weigh costs and benefits over a specific time horizon which typically depends on how long we expect it to take for the policy to achieve its intended impact and how persistent we expect the costs and benefits of the policy to be. Similarly, we pick a discount rate, generally HMT’s Green Book rate of 3.5%, to determine the present value of any future costs and benefits. And we probability-weight different scenarios, which means policymaker risk preferences are not explicit.

These steps and assumptions allow us to think about the potential benefits of preventing potential threats to the financial system from happening. But they are also limited in a number of ways. For one, they do not explicitly account for the risk preferences of policymakers, given that we probability-weight different outcomes: the FPC is assumed to be indifferent between policy choices with the same expected value, which might not necessarily be true and in fact might not be compatible with our remit.^{footnote [16]} Similarly, it assumes that benefits only accrue during discrete crisis episodes.

However, that might be too limited a lens through which to think about macroprudential policy. For one, our choice of time horizon and discount rate may not be appropriate in considering the intergenerational impacts of our policy choices. One of the most prominent long-term risks currently on policymakers’ minds is the impact of climate change, a phenomenon whose impacts will be felt generations upon generations into the future. And as Mark Carney^{footnote [17]} amongst many other has noted, this results in a “tragedy of the horizon,” wherein the “catastrophic impacts of climate change will be felt beyond the traditional horizons of most current actors, imposing a cost on future generations that the current generation has no direct incentive to fix.” Determining how these longer-term risks are captured by CBA is one of the defining challenges in evaluating macroprudential and indeed, all other real economy policy interventions.

Beyond these assumptions, and whether they remain suitable in cost-benefit analysis of macropru, there are also a number of factors that are simply not captured by this approach to evaluation. For one, welfare and distributional effects are not typically factored into current CBA outside of those captured in macroeconomic outcomes. The costs and benefits at the individual household or firm level are not captured here: for example, if a mortgage debt limit results in net GDP benefits, but produces a frustrated cohort of would-be first-time homebuyers who instead continue renting, how should we account for these when we think about policy^{footnote [18]}? Being clear about these choices is important to fostering trust in our decision-making.

In addition, CBA has never been comprehensive about how to deal with the presence of uncertainty: if we are uncertain about the precise nature of an externality or the way in which it manifests itself as a financial stability risk, how should we act? William Brainard’s work, for example, suggests that the response of monetary policymakers to uncertainty can be to use their tools more cautiously, even if this is likely to result in overall worse outcomes on average. But this may be precisely the wrong approach for financial stability policy to take in the face of uncertainty: proactively building resilience to risk may be the best option, rather than acting too late and allowing dire consequences to emerge. The best option for macroprudential policymakers remains uncertain, but Bank of England staff continue to work on additional factors we may want to take into consideration as part of our evaluation of macroprudential policy.

LDI and risks on the horizon

With these uncertainties in mind, let me touch on the recent episode of stress among liability-driven investors that I briefly mentioned in the introduction, as well as what we might draw from that episode, and discuss some of the other risks that the FPC and I see on the horizon.

In late September, as you all know, an unprecedented increase in long-dated gilt yields exposed vulnerabilities associated with the LDI funds in which many defined benefit pension schemes invest. This resulted in a spiral of collateral calls and forced gilt sales that risked leading to further market dysfunction. On 28 September, the Bank announced it would temporarily buy long-dated UK government bonds until 14 October, as well as other measures including a new repo facility introduced on 10 October. Real and nominal gilt yields fell significantly following the announcement. And in the weeks since, LDI funds have been able to rebuild their resilience to future shocks. Market intelligence suggests that LDI funds have raised significant capital both from their clients and from assets sales, reducing their leverage and making them more resilient.

The Bank’s intervention was explicitly motivated by our statutory financial stability objective: the purpose of the FPC’s decision was to remove the liquidity premium associated with the potential for run dynamics. This represented a real-life stress test for our policy framework for financial stability intervention, from which we will work to draw lessons. The Bank, the Pensions Regulator, and the Financial Conduct Authority are closely monitoring the LDI managers to ensure their resilience endures and meets the test of any future stress.

Turning to the horizon, in the July FSR, we noted that the economic outlook for the UK and the world had deteriorated materially, and was subject to considerable uncertainty and downside risks. Global financial markets had been volatile, and liquidity across major asset classes was poor – including in the gilt market. Similarly, we noted that the rise in living costs and interest rates will put increased pressure on UK household finances and corporate balance sheets.

Since then, the outlook has deteriorated significantly, and by more than had been expected. Prices and interest rates have both continued to rise, and markets have been turbulent. Households and corporates are both more vulnerable to shocks. For example, assuming rates follow the market-implied path at the end of September which were priced to peak at around 6%, the share of households with high cost-of-living adjusted mortgage debt-servicing ratios would increase by end-2023 to around the peak levels reached ahead of the GFC^{footnote [19]}. In addition, the share of businesses with low interest coverage ratios, a measure of how easily firms can service its debt, is expected to increase materially, albeit remain below historic peaks.

Furthermore, the UK’s external balance sheet is vulnerable to reductions in foreign investor appetite for UK assets, which can cause falls in UK asset prices and tighter credit conditions for UK households and businesses. The composition of the UK’s external liabilities may also make it vulnerable to refinancing risk. Both of these risks may be heightened in current circumstances.

Conclusion

All of these are increasingly well known to policy makers as potential or actual risks. But in the FPC’s efforts to build trust, we need to be clear on how these risks can translate into outcomes that really matter for people. For instance, the stress in LDI funds lead to the withdrawal on hundreds of mortgage products, the vulnerabilities in the household and corporate sectors might lead to more expensive and fewer loans, and a weaker economy as a result.

The topic for tonight’s lecture has been whether we can – and in the case of recent interventions, have already – communicate the nature of these risks and the way in which policy interventions are intended to address them, in order to make ourselves worthy of trust. I have touched on a number of tools and interventions available to macroprudential regulators such as the FPC. The question is whether the actions implied by the use of these tools can be made sufficiently intelligible to build trust in the ability of an organisation like the FPC to monitor and respond to risks to financial stability – and very importantly, to communicate both its understanding of those risks and the actions it is taking, in a way that can help to build public trust. This will always be a work in progress because that is the nature of financial stability. It is not easy to cover this terrain and the various tools available to the FPC in a way that is susceptible to broad level of public engagement. But I hope that this talk, which is intended to contribute to this objective, has at least made it more tangible to you how the FPC can make its insights and actions transparent. 

This is a tall order as I think recent events have shown. But my contention is that the communication of the drivers of actions intended to protect or restore financial stability is central to the building of trust in macro pru policy. To be trusted, we have to be trustworthy.

Thank you

I am grateful to Andrew Bailey, Sarah Breeden, Neal Kilbane, Philip Anderson, Pierre Ortlieb, Dan Elliott, Simon Lloyd, Dennis Reinhardt, Andrew Gimber, Rhiannon Sowerbutts, Sarah Venables, Robert Edwards, and Ali Moussavi for their assistance in helping me prepare these remarks.