The Governor also spoke about the trade-off as part of his speech the “Grand Unifying Theory (and practice) of Macroprudential Policy” available at https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/the-grand-unifyingtheory-and-practice-of-macroprudential-policy-speech-by-markcarney.pdf?la=en&hash=53A55C800C6B04573DC04FD2F9579079A3503FED 7 See https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultationpaper/2020/cp220.pdf?la=en&hash=133449CBB3D0FDD2B03AC6242C99C3F36A150258 8 The second core principle states that ‘[t]he supervisor possesses operational independence, transparent processes, sound governance, budgetary processes that do not undermine autonomy and adequate resources, and is accountable for the discharge of its duties and use of its resources’ (https://www.bis.org/basel_framework/chapter/BCP/01.htm?inforce=20190101). 6  I would like to thank Matthew Willison, Hugh Burns, Nicolo Fraccaroli and David Swallow for their assistance in preparing these remarks 7  Regulatory independence and financial stability in practice  Does the evidence support the theory that an independent regulatory body with a clear mandate and strong accountability produces better outcomes? At the Bank, Fraccaroli, Sowerbutts and Whitworth (2019) have been researching whether the institutional structure for prudential regulation affects financial stability in practice. They have done this by analysing whether there is a statistically significant association between the independence of the prudential regulator and/or supervisor and financial stability outcomes. The authors have constructed for different countries and over time an index of regulatory-supervisory independence. The index combines three aspects of independence: institutional; regulatory; and budgetary. The definitions of these aspects can be found in Table 2. Table 2: Definitions of aspects of independence captured in the Regulatory-Supervisory Independence index Aspect of independence  Definition  Institutional  This captures the involvement of political bodies in the appointment and dismissal of the head of the regulatory agency, as well as length of their term.

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.