Furthermore, the Chancellor writes regular letters to both the FPC and the Prudential Regulation Committee, setting out the Government’s economic policy and making recommendations on how they should discharge their functions. Importantly, the PRA takes into account the FPC’s views on financial stability when setting microprudential policy. To give an example of how this works in practice – in 2015 the FPC set out the optimal overall level of UK capital requirements, balancing financial stability against economic growth. The PRC then took into account this judgement when setting individual bank capital requirements. And at the end of last year, the Financial Policy Committee (FPC) raised the structural level of the UK countercyclical capital buffer (CCyB) rate - that is the rate it expects to set in a standard risk environment - from in the region of 1% to in the region of 2%. Then, last month, the PRA consulted on proposals to reduce variable microprudential minimum requirements (so-called variable Pillar 2A capital requirements) to take account of the additional resilience associated with higher macroprudential buffers in a standard risk environment.7  In addition to setting out a clear mandate in primary legislation, there are also a number of accountability mechanisms in place for Parliament to scrutinise the work of the FPC and PRA against that mandate. For example, PRA senior representatives are expected to appear before the Treasury Select Committee (and other Parliamentary Committees), when requested. And the PRA Annual Report is laid before Parliament.

Klomp and de Haan (2009) find a negative association between a measure of financial instability and the degree of central bank independence. There is also evidence that supervisors that are probably more independent of the banks they supervise tend to be more robust. For instance, Agarwal et al (2014) finds in the United States federal regulators are twice as likely to downgrade banks’ supervisory ratings as state regulators. Ben-David et al (2018) analyse the impact of supervisory responsibility for large banks moving from national regulators to the ECB’s Single Supervisory Mechanism or SSM. They find banks for whom the SSM became their supervisor sought to manipulate their balance sheets to fall below the thresholds for being in scope of the SSM, suggesting banks anticipated that the SSM would be a tougher supervisor. I would like to thank Matthew Willison, Hugh Burns, Nicolo Fraccaroli and David Swallow for their assistance in preparing these remarks 10  The results in Table 3 mean that when countries implemented reforms that increased the independence of their prudential regulator and/or supervisor, non-performing loans as a proportion of total lending decreased. Greater regulatory independence increased financial stability. But did greater regulatory independence come at a price of less efficient banks or slower credit growth, a version of what is sometime referred to “as the stability of the graveyard”? It seems that it did not – see Table 4. First, the authors replaced the non-performing loans with a measure of bank efficiency: the ratio between a bank’s expenses and its income.