Financial stability and growth: The Financial Policy Committee’s mandate and the question of balance − speech by Jonathan Hall

Speech

I am very happy to be with you at the CBI today to discuss the reasons for, and the implications of, the FPCs mandate.

By the end of our conversation, I hope I will leave you with the following impressions:

1. The FPC’s mandate appropriately balances efficiency and resilience, in support of long-term growth.
2. A natural consequence of this mandate is that an extreme shock may overwhelm private financial sector resilience.
3. In such cases additional "backstop" policy tools are necessary to protect the system. Intervention for financial stability reasons is a feature, not a bug, of socially optimal policy.
4. Executing on our mandate involves optimising the balance between frontline private sector resilience and public sector backstops.

As a general point, when evaluating a financial policy there are two perspectives to consider:

First, will the proposed policy move the level of system-wide resilience in the right direction along the stability-growth curve? This will be the primary focus of my remarks today.

Second, will the proposed policy shift the overall regime towards the efficient frontier, where the economy achieves the highest sustainable growth for a given level of stability? This is an important topic on which we have announced a number of initiatives^{footnote [1]}, but which will remain in the background of today’s discussion. You should expect to hear more on this, including in the FPC’s upcoming December Financial Stability Report.

Since the financial crisis of 2007/8, the FPC and other regulators have significantly increased the resilience of the financial system and have done so within a framework that aims to support long-term growth. Whilst I am sure that we have not yet reached the efficient frontier of socially optimal policy, there has been significant progress, and I hope you will agree that our approach is the right one.

Part 1 - The origins of the FPC’s mandate

Financial crises cause long-term social harm

The FPC was set up in the wake of the great financial crisis of 2007/8 (the “GFC”). Its founding was justified by an argument along the following lines:

1. Private behaviour in financial institutions in the late 1990s and early 2000s created vulnerabilities. Examples include liquidity mismatches and undercapitalised risk within institutions, and high correlation and connectivity between institutions.
2. When the credit cycle turned, those vulnerabilities amplified the economic downturn to create the GFC. The bursting of the credit bubble led to a self-reinforcing doom-loop, where lower asset prices triggered selling and credit tightening, pushing prices lower and harming the economy, causing further selling and tightening.
3. The short and long-term costs of the GFC on households, businesses and the public purse were unacceptably large.

Chart 1 and Chart 2: UK GDP and public sector net debt to GDP (1997 – 2016)

To put it in overly mild economic speak, the level of private resilience within financial institutions leading up to 2007 was, from a welfare perspective, socially suboptimal. This lack of resilience turned an economic slowdown into a financial crisis, lowering the long-run level of GDP through the initial fall, and through economic “scarring” which had a persistent negative effect on the growth rate of the economy.

Therefore, so the argument goes:

1. Enhanced regulation was necessary to increase the level of resilience within financial institutions towards the socially optimal level.

A financial institution or system should be resilient to the stresses it might face, just as an ocean-going ship should be resilient to stormy seas. Resilience in this context should be understood as the ability not just to survive a stress, but to continue to function as a service provider. Only then can the financial system support households and businesses in bad times as well as good.

The relevant stress scenarios are not forecasts, but possibilities. For the financial system they include economic downturns, sudden liquidity demands and cyber-attacks. To enhance resilience, individual firms can increase their capital, liquidity or operational resources, creating “self-insurance” against stress. These not only make an institution less likely to fail but also reduce the likelihood and magnitude of pro-cyclical behaviour that would amplify a shock^{footnote [2]}.

In the GFC many financial institutions acted in a way that was privately suboptimal. Their names live on in infamy. But it is also true that firms who acted rationally relative to their own position, did not fully factor in changes in system-wide vulnerabilities. And firms never factor in externalities, such as the costs borne by households, non-financial businesses and governments, unless they are forced to. To increase resilience to the socially optimal level, it was not only microprudential regulation that needed to be strengthened. A macroprudential focus was necessary.

In response, through legislation passed in 2012, the FPC was created to specifically focus on the resilience of the financial system as a whole. It was given the task of identifying, monitoring, and taking action to mitigate systemic risks which increase the likelihood of financial instability^{footnote [3]}, where a stable financial system is one that is able to deliver essential financial services to households and businesses^{footnote [4]}.

1.2 Protecting against the “Stability of the Graveyard”

The FPC was created in accordance with the view that, while elected governments should set financial (and monetary) policy goals, the bodies implementing policies to achieve those goals can only do so effectively if they are protected from short-term political pressures. Operational independence is justified, but only in service of the specified goal^{footnote [5]}. For the FPC, performance is monitored by Parliament, mainly through the Treasury Select Committee, and committee members are subject to praise or blame only relative to that mandate.

Given this, and to protect against unintended consequences, careful and precise specification of the FPC’s mandate was important. If members of the committee were tasked with targeting financial stability only, then they would be incentivised to require financial institutions to self-insure against all possible eventualities. This is the only way that they could be certain to avoid blame for failing to satisfy their mandate. At the extreme, the cost of this self-insurance would be so great that the provision of financial services becomes commercially unviable. We would have stability, but it would be the
so-called “stability of the graveyard.” This extreme is clearly not welfare optimising.

The GFC revealed that private markets push the financial system too far towards brittleness. Financial stability is a necessary condition for sustainable growth. But those strengthening the regulatory regime needed to make sure that they didn’t unintentionally cause an overcorrection, pushing the system too far towards stagnation. The implication, that the aim should be towards what Aristotle called a golden mean between the extremes of deficiency and excess^{footnote [6]}, draws support from analysis of natural ecosystems.

Chart 2: System sustainability as a function of efficiency and resilience (a)

Footnotes

• (a) Source: B Lietaer et al. (2010)^{footnote [7]}

To mitigate stability of the graveyard risk, not only was the FPC given a secondary mandate to support the government’s economic policy, including growth objectives, but it was also clarified that the primary element of the mandate, stability, did not authorise actions that harm long-term growth. Here is the language in the 2012 legislation:

1. The Financial Policy Committee is to exercise its functions with a view to –

(a) contributing to the achievement by the Bank of the Financial Stability Objective [ie to promote and enhance the stability of the financial stability of the financial system in the UK] and

(b) subject to that, supporting the economic policy of Her Majesty's Government, including its objectives for growth and employment.

(4) Subsection (1)(a) does not require or authorise the Committee to exercise its functions in a way that would in its opinion be likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term.

Some of you might worry that there is a gap between the legalese of the mandate and what is precisely socially optimal. I am happy to explore this further in questions but for now I will make three points. First, there is a social value in stability (and a social cost in volatility) that, when incorporated, pushes the optimum to the right, as illustrated by chart 3. Second, the legislation requires the FPC to consider the proportionality of its policies^{footnote [8]}. And third, this is an imprecise science. What is optimal should, in practice, be considered a range - analogous to the window of viability. Given this, I will assume that the mandate does direct the FPC towards the socially optimal range^{footnote [9]}. As Financial Secretary to the Treasury, Mark Hoban, said in parliament at the time, it “is in the FPC’s objectives to get the right balance between stability and growth.”

Chart 3: Finding the socially optimal balance between growth and stability

Whatever one’s view, it is the mandate that matters. That is what governs our decisions.

1.3 A focus on sustainable medium to long-term growth

Before leaving the discussion of the FPC’s mandate, it is important to emphasise that the growth on which we focus is medium to long-term growth. Optimal policy can imply slightly lower short-term growth in good times if this is outweighed by significantly higher (or less negative) growth in stress. In that sense, financial policy is like house insurance or a
rainy-day fund - a small annual drag can be worth it if it removes the existential risk associated with a low probability but high consequence event.

Chart 4 illustrates this by looking at UK growth between 2000 and 2016. If we imagine that financial policy would have acted to slow short-term growth somewhat in the period in the run-up to the GFC (bringing us closer to the orange line rather than the aqua), this would have been justified if it reduced the resulting scarring caused by the GFC, and allowed output to return closer to the pre-crisis trend (the dotted orange line) as in a more ‘typical’ recession.

Chart 4: Path of UK GDP versus an illustrative counterfactual

I hope that gives you a good feel for the FPC’s mandate and some comfort that it is well constructed. I will now briefly discuss an element of our implementation framework, before turning to an important consequence of the balanced approach.

Part 2 - The implementation of the FPC’s mandate:
Self-insurance to withstand a severe-but-plausible shock

In general, the FPC’s policies aim to reduce pro-cyclical behaviour, particularly in a downturn, reduce the riskiest tail of the distribution, and ensure that institutions and the system are resilient to a “severe but plausible” shock.

This “severe but plausible” framing is explicit in our stress-testing communications. For example, the Bank’s recently published updated approach to stress testing the UK banking system states that the scenario used in Biennial Bank Capital Stress Tests ‘will be severe but plausible, vary with the state of the financial cycle and typically be countercyclical.’

In general, this framing has proven uncontroversial and consistent with the mandate, but there is a legitimate debate about the size of stress it implies. How wide and how skewed is the distribution of possible outcomes, and how far into the tail is equivalent to severe but plausible? Is history a good guide or has there been a shift in paradigm? This opens the possibility of differences in opinion, both within the committee and with the wider financial community, but in general the flexibility is intentional. It ensures that the amount of
self-insurance required can be responsive to the policy and risk environment. For example, the size of a plausible shock increases as a credit bubble expands. We employ this flexibility in stress-test scenario design, and it is consistent with our setting of the
counter-cyclical capital buffer (CCyB).

I will return to the severe but plausible framework later, but first I would like to explore an obvious implication of any policy that requires less than full insurance against all possible eventualities. This framework, which follows from the mandate, leaves open the possibility that a large shock could overwhelm self-insurance.

Part 3 - An implication of the FPC’s mandate: intervention may sometimes be necessary

Public policy responses to extreme stress

It is clearly possible that a shock can be larger than that which was ex-ante considered severe but plausible and private self-insurance will be overwhelmed. What then?

The first port of call in this situation would be counter-cyclical macroprudential tools such as the CCyB, which the FPC cut in response to stress in both 2016 and 2020.

Beyond this there are two options. We can either allow financial instability or implement a “backstop” public policy response. Both theoretically and based on the GFC experience it seems clear that the economic and social costs of system-wide collapse would far outweigh any benefits of non-intervention. Given that, it becomes incumbent upon public policy makers to design contingencies that would restore stability in the case of an extreme event, whilst trying to minimise the public cost of such policies.

Chart 5: Public vs private insurance against shocks

In recent years the Bank, working with the government and other regulators, has been enhancing its toolkit for dealing with the consequences of such extreme events. Recent advances build on two well established principles - that retail deposits up to a certain threshold should be protected in the event of a default, and that central banks should act as lenders of last resort. I will outline some details of these updated contingencies now, before turning to the costs of such policies, including moral hazard.

Financial instability can manifest through three channels: essential services, systemic institutions and systemic markets. Although I will focus today on systemic markets, the Bank has also updated policies to deal with failures in the other two channels. For example, with regards essential services, we ensure the rapid recovery of payment systems in a socially (rather than privately) optimal manner by setting impact tolerances^{footnote [10]} and supporting both public and private sector response frameworks^{footnote [11]footnote [12]}. The effectiveness of this framework is checked and enhanced through frequent stress tests. With regards systemic institutions, the Bank is the UK’s resolution authority and has the capabilities and legal powers to deal with failing firms according to the circumstances. From a macroprudential perspective, the aim is to minimise the possibility that the failure of an institution amplifies and propagates the stress to the system as a whole^{footnote [13]footnote [14]}. As recent situations like Silicon Valley Bank and Credit Suisse have shown, resolution often relies on strong international cooperation and communication^{footnote [15]}.

3.1: Public policy responses to extreme stress in systemic markets

Market prices are a common good which underpin the vital services on which UK households and businesses rely. They provide liquidity for buyers and sellers and valuable information about the fair price to economic decision makers.

Price declines and volatility do not, on their own, constitute financial instability. Such moves can be a rational response to negative economic news or increased uncertainty, and individual firms can suffer losses or failure without it becoming systemic.

Only when systemically important markets stop functioning to the extent that the stable provision of financial services is threatened does intervention for financial stability reasons become a consideration.

Unfortunately, this condition will sometimes be met not least because the amount of
self-insurance held by market participants is not great enough to ensure resilience against all possible scenarios. Therefore, over the past few years, the Bank has developed intervention tools which can be activated to address market dysfunction.

The Bank has developed two tools, responding to the fact that there are two categories of shock that could cause financial instability - liquidity shocks, which harm firms’ ability to fund themselves, and capital shocks, which leave firms with too much leverage or risk, or threaten their solvency.

In the former, solvent firms with good collateral experience a liquidity need (due to margin calls, for example) at a time when banks are unable or unwilling to lend. If firms cannot meet their liquidity needs through borrowing, then they are forced to sell assets to raise cash. Not only will this increase the chance that an ex-ante solvent institution will become insolvent ex-post, due to the fire sales necessary to meet withdrawals, but from a market wide perspective it could drive asset prices lower, amplifying the stress.

For situations in which financial stability is threatened by a liquidity shock, the Bank has developed an additional tool, over and above the liquidity facilities available for participants in the Sterling Monetary Framework: The Contingent Non-Bank Repo Facility (CNRF) for pension funds and insurance companies^{footnote [16]}. This acts as a kind of funding liquidity (re)insurance, which will only be activated when the Bank deems it necessary to restore market functioning. It’s design is consistent with the Bagehot principal that central banks should stand ready to lend to sound firms, against good collateral, and at rates higher than those prevailing in normal market conditions^{footnote [17]}. If activated, it allows eligible pension funds and insurance companies with gilt collateral to borrow directly from the Bank of England, easing the market-wide liquidity shock, reducing fire sales and the risk of further instability. We encourage all eligible firms to sign up for the CNRF now as it may not be operationally feasible to onboard new firms in a stress.

In the secondary category of shock, financial institutions hit a solvency, leverage or risk constraint which forces them to reduce risk into declining markets. In this case borrowing, even from the Bank, will not solve their problems. They have to de-risk by selling assets (or by raising capital^{footnote [18]}). If that selling is market-wide and in systemic markets such as gilts, then financial stability may be threatened. For such cases the Bank can implement a temporary buy/sell operation. This backstop, temporary and targeted asset liquidity (re)insurance aims to support the orderly functioning of systemic markets, not the solvency of individual financial institutions or specific market levels. Purchases are undertaken for only as long as required to maintain financial stability and unwound through sales back to the market in a timely and orderly way once the market dysfunction is resolved^{footnote [19]}.

As you will all remember, such an operation was implemented in 2022, when long maturity gilt yields rose by 130 basis points in a matter of days. This increase, at three times the size of any comparable historical move, was greater than what was ex-ante considered severe but plausible, and overwhelmed Liability Driven Investment (“LDI”) firms’ buffers of 100 basis points and their operational capabilities. Waves of LDI selling risked causing a self-reinforcing spiral, pushing gilt yields higher and harming the ability of households and businesses to borrow. Long-end gilt and linker purchases by the Bank over 13 days stabilised the market and gave pension funds and their corporate owners time to recapitalise the LDI funds^{footnote [20]}. By the end of November, the Bank had begun unwinding this portfolio, and by mid-January 2023 that unwind was complete.

There are two lessons from this event that I would like to highlight^{footnote [21]}:

First, the 2022 episode illustrated the importance of a Bank backstop for when there is a shock greater than was ex-ante considered severe but plausible. Given the FPC’s mandate, intervention for financial stability reasons is a feature rather than a bug. The mandate naturally leads to a policy mix which combines frontline private self-insurance with backstop public (re)insurance.

Second, the solvency of individual pension funds as a whole - including the LDI losses - was increasing as yields rose, so for the pension fund and its corporate sponsor this was a liquidity stress, not a solvency stress. As such, our preferred solution was to lend against collateral, but this proved unfeasible because the pension funds were operationally incapable^{footnote [22]}. This is one reason why we have publicly launched the CNRF now and are urging eligible participants to sign up. They need to build operational readiness.

If we ever have market stress in the future, I hope that the CNRF will be at least part of the solution. Despite this, I believe it is important to have both funding liquidity and asset liquidity tools in the toolkit. A preference for the former, does not imply that the latter should be retired.

These backstop public policies reduce harm in the event of a shock greater than that to which market participants have self-insured. By setting them out clearly in advance, market participants can factor these policies into their operational planning. These are clear benefits, but it is important to also consider the cost side of the ledger. I turn to that now.

Part 4: Considering the costs of public intervention

I have argued that a natural implication of the FPC’s mandate is a need for public backstops^{footnote [23]}. The Bank has understood this and worked to design and operationalise backstop tools. But the analysis so far does not take account of any costs of such interventions. In this section I will consider those costs before bringing everything together.

The costs of public intervention can be divided into three categories: financial costs, political costs, and moral hazard. I will discuss each in turn.

Financial costs of public intervention

There are two ways to think about the financial costs of market intervention^{footnote [24]}. These broadly correspond to a) the mean expected outcome, and b) the risks around that mean:

In theory and on average, market interventions for financial stability reasons should be profitable^{footnote [25]}. This is because funding liquidity insurance is provided to solvent institutions against good collateral and at rates higher than those prevailing in normal market conditions, and asset liquidity insurance involves buying assets at a distressed level and selling them back when conditions have normalised. The Bank is acting as a lender- or market-maker-of last-resort, stepping in to fulfil a profitable function normally supplied by market participants - the provision of liquidity in return for bid-offer and risk premium. For that reason, unconstrained investors are unlikely to take the other side of a financial stability intervention as doing so would likely be loss-making. Indeed, the announcement of such an intervention is usually followed by a rally, as unconstrained investors regain confidence to step in and “buy the dip.”

In practice, however, public interventions are rare and idiosyncratic, and the profitability of any specific intervention is uncertain. Prior to the 2022 intervention the UK Treasury (“HMT”) provided the Bank of England with a £100bn indemnity to back its operations. Although, this dwarfs the actual £19.3bn of gilt purchases and contrasts with the eventual positive return to the government of £3.8bn, it does indicate the significant uncertainty that the Bank and Treasury were facing when the purchase operation was announced. Put another way, even if it is true that the mean of the cost distribution is positive, a
non-negligible percentage of the distribution is negative and the size of the potential losses in the tail are significant. This riskiness to the public purse must be included in any analysis of when to intervene. The Bank does this, in coordination with HMT, by – subject to meeting its statutory policy objectives in the design of any financial stability intervention - seeking to ensure value for money by minimising financial costs and risks in the design and execution of that financial stability interventions. Of course, even if a financial stability operation were to lose money, this loss may be preferable to the consequences of prolonged financial instability.

4.2 Political costs of public intervention

After the GFC, there was a lot of anger at the banking bailout. In the context of today’s discussion, I think that anger was justified by two facts. First, and most importantly, the balance between self-insurance and public (re)insurance was completely wrong. Many financial institutions underestimated the risk of their portfolios and had far too little capital and liquidity relative to their exposures, and then, because the social cost of systemic collapse was so high, the Government had to provide support. This seemed not only to save those to blame from bearing the cost of their actions but also to incentivise them to do the same again. Second, the reaction function of policy makers seemed time inconsistent or, at the very least, opaque. The bailout, although necessary for the system, was not something that was justified to the public sufficiently far in advance.

Since the GFC the actions of the FPC and other regulators have significantly rebalanced the relative levels of insurance in the system and done so within a framework that aims to support long-term growth. Whilst I am sure we have not yet reached the efficient frontier of socially optimal policy there has been significant progress. In addition, we have tried to be transparent about our thinking and our policy tools, through regular publications, speeches and hearings. Having said that, I think there is more to be done here. After the events of 2022 there was some confusion about whether intervention necessarily implies a failure of financial stability policy. I hope I have shown today that, as a general point, it does not. Intervention is a feature rather than a bug of socially optimal financial stability policy. It is a direct consequence of the mandate and the possibility of a shock that is greater than that ex-ante considered severe but plausible.

4.3 Moral Hazard costs of public intervention

When any economic agent is insured by an external provider, they no longer bear the full downside risk of their actions. This creates moral hazard - the incentive for the externally insured economic actor to take more of the insured risk. If that increased risk-taking causes financial instability, then it is the public purse that is on the hook for any losses. The moral hazard created by any backstop policy is an important cost that must be assessed ex ante.

Importantly, prudential regulation constrains the ability for regulated entities to respond to these incentives towards excessive risk taking. That is why the PRA and FPC’s urgent first task was to focus on increased and counter-cyclical self-insurance. At the limit in an appropriately calibrated and watertight prudential regime the moral hazard risk is neutered. This justifies what is sometimes called the grand bargain – public support should only be available to those that are within the regulatory perimeter and have appropriate levels of self-insurance.

Unfortunately, the regulatory regime is, in practice, not watertight. In particular, there are non-bank financial institutions who are increasingly important to the functioning of systemic markets like gilts but are outside of the UK regulatory perimeter and have low levels of self-insurance. The Bank’s interventions are intended to resolve market-wide dysfunction, but if the public perceives that a market intervention ends up supporting these firms in stress, then the public outcry seen in the GFC could be repeated but targeted against these non-banks.

There are three ways to mitigate the moral hazard risks of interventions for financial stability reasons.

The first and most obvious is to target interventions towards only those firms that are regulated (and solvent). This is the approach we took with the launch of the CNRF, which is only available to regulated pension funds, LDI and insurers.

The second is to use backstop pricing (buy/sell tool) and/or haircuts (CNRF), consistent with the Bagehot principle. Indeed, if interventions for financial stability reasons follow this principle^{footnote [26]} then an excessively risky firm may fail before the backstop is hit, so will not benefit from the intervention. This shifts private incentives towards risk reduction. In general, allowing excessively risky institutions to fail, whilst preserving the system as a whole, is beneficial from a political and moral hazard perspective.

The third approach is to work alongside global regulators to increase the levels of
self-insurance at both UK and non-UK financial institutions and the overall resilience of markets. This is currently a priority of the Financial Stability Board and may be
entity-based, as when we worked with regulators from Ireland and Luxemburg to increase requirements for LDI firms, or activity-based, as in minimum haircuts and/or central clearing for gilt repo^{footnote [27]footnote [28]}. It would be worrying if this important work to build resilience were threatened by reduced global cooperation, as this would unfairly shift the cost of insurance from overseas firms to UK institutions and the UK public.

Notwithstanding the worry about global cooperation, this analysis suggests a relatively simple conclusion: All three kinds of public cost can be minimised and managed, but only in the case of true backstops. If a public intervention is too early or frequent, financial, political and moral hazard costs risk becoming unacceptably large.

Part 5: The FPC’s mandate in the context of intervention tools: Bringing it all together

So where do we find ourselves?

We began by exploring the FPC’s mandate in the context of the balance between efficiency and resilience. We then found that executing that mandate involves optimising a second, distinct balance: between frontline private self-insurance and backstop public (re)insurance. Through this approach, financial stability policy supports long-term growth.

The required level of self-insurance that follows from this optimization is not fixed but dynamic. It moves countercyclically with the risk environment - at the top of a credit cycle economic risks are greater and the cost of self-insurance is lower - and is responsive to the wider financial stability regime. As an example of this latter point, the Bank reduced its post-crisis capital requirement estimate by 5% in light of expected improvements in the resolution regime^{footnote [29]}.

Chart 6: Dynamically adjusted public vs private insurance against shocks (a)

Footnotes

• (a) For ease of representation we have shown a moving boundary between public and private insurance on a static normal distribution. However, in practice the distribution is also dynamic.

I introduced the idea that self-insurance should cover all severe but plausible events. Does this remain appropriate given the public-private framework outlined? I think the answer is broadly yes. From a public cost perspective, it certainly feels right – firms should be able to continue to function in severe but plausible stress without recourse to public support. If self-insurance requirements were set at a sub-severe level and intervention became commonplace, then public costs (of all three kinds) could be very high. And from the private cost perspective what is severe but plausible typically does vary with the state of the financial cycle, so is appropriately countercyclical.

In addition, what is severe but plausible is influenced by the current context, including the financial policy regime. If that regime reduces the risk of systemic stress, as with changes to resolution, then what is severe but plausible narrows, and the amount of self-insurance is reduced. If, on the other hand, the global regulatory regime was weakened then the severe but plausible framework would, appropriately, push in the opposite direction.

However, I wouldn’t want to take my defence too far. It is certainly possible that for some policy tools the severe but plausible framework may struggle to accommodate the full facts, and we should be open to that challenge. In general, the interaction between relative costs and policy calibration is an exciting area of ongoing research^{footnote [30]}.

And finally, within any given envelope of aggregate resilience it is possible for inefficiencies to be present. To reduce such inefficiencies, the FPC has recently simplified and respecified its housing tools and welcomed the PRA’s strong and simple framework for smaller banks. We are also currently refreshing our assessment of the capital requirements in the UK banking system and will provide an update in December^{footnote [31]}. This is a topic worthy of more discussion, but unfortunately that will have to wait for another day.

There is plenty more to be done, but I believe the actions of the FPC have moved the financial system closer to the socially optimal levels of private and public insurance. Even if a theoretical optimum is practically unachievable, progress towards that goal is of value and I hope that explaining the framework gives helpful transparency about our decision making.

We are open for feedback, both this afternoon and beyond.

Thank you for your time, and I look forward to your questions.

I would like to thank Andrew Bailey, Nat Benjamin, Will Bennett, Phil Blackburn,
Sarah Breeden, Olly Bush, Rand Fakhoury, Lee Foulger, Chris Goodspeed, Anil Kashyap, Pippa Lowe, Rob Price, Vicky Saporta, Sophie Stone, and Matt Waldron for their help in preparing these remarks.