Finance: Research, Policy and Anecdotes

Macro-financial policy in the UK

Some time ago I was asked to contribute a paper to the Asian Monetary Policy Forum 2021 Special Edition and MAS-BIS Conference on "Macro-financial stability policy in a globalised world: lessons from international experience”, held virtually last May.  Joint with three co-authors from the Bank of England – Simon Lloyd, Dennis Reinhardt, and Rhiannon Sowerbutts-  we contributed a paper that combines a description of the post-GFC supervisory structure in the UK, a discussion on the UK’s position as an international financial centre, and the implications for inward and outward spillover effects of monetary and prudential policy actions and an empirical analysis of the effect of monetary policy surprises in the UK on cross-border lending towards other countries. The Global Financial Crisis led to a restructuring of the monetary and prudential policy architecture in the UK, with bank supervision returning into the fold of the Bank of England. The monetary policy committee is responsible for monetary policy, the prudential regulation committee for microprudential regulation and the financial policy committee for macroprudential regulation; while separate committees, there is a heavy overlap in terms of members. Such overlap can be helpful in crisis situation, as the coordinated policy response in March 2020 showed.

 

The special role of London as international financial centre means that it is highly connected with the rest of the world. These connections alsogo beyond service trade linkages. The UK is host to over 200 international banks, and UK-based banks – spanning foreign branches and subsidiaries – have over $5 trillion in cross-border claims. This has implications for the policy making of the FPC and its stress testing framework. About half of the possible GDP stress in the FPC’s Annual Cyclical Scenario are due to external factors.

 

In a final part of the paper, we combine panel data on UK-based banks’ cross-border lending with UK monetary policy shocks and macroprudential policy actions based on data from the IMF’s Integrated Macroprudential Policy (iMaPP) Database. We find that a surprise UK monetary policy tightening significantly reduces UK-based banks’ external lending growth, but ab additional prudential policy tightening action in the recipient country, in advance of a surprise UK monetary policy tightening, can partly offset spillovers to lending growth.  We also find that these effects are primarily driven by foreign-owned branches and subsidiaries. Differentiating between different types of macroprudential policies, we find that cyclical prudential policies affecting particular loans and in particular housing loans can act to significantly offset the effect of UK monetary policy shocks, while other policies, including counter-cyclical capital requirements, are not effective. In sum, and in line with other papers, we find support for the thesis that (macro)prudential policies can help insulate countries from the global capital flows cycles.