If the FPC requires lenders to carry higher capital, liquidity or collateral, that will affect credit conditions and so the outlook for aggregate demand and inflation. In the other direction, monetary policy settings plainly affect asset prices, and so influence credit conditions through the net worth of borrowers and lenders. Also, it seems to me plausible that they affect risk-seeking behaviour,11 especially in a world in which many investment managers have nominal return targets. Given those two-way interactions, some commentators worry about co-ordination problems from having separate monetary policy and macroprudential committees with different objectives. 9  “Reforming the International Financial System”, Mark Carney, Bank of Canada 2009. 10  “The role of margin requirements and haircuts in procyclicality”, CGFS Paper No.36, Bank for International Settlements. 11  See, for example, De Nicolo, Dell’Ariccia, Laeven and Valencia, “Monetary Policy and Bank Risk Taking”, IMF, 2010. BIS central bankers’ speeches  9  As I have already explained in the context of having distinctive machinery for microsuperivsion, the UK has favoured having a separate macroprudential committee in order to ensure that the stability of the financial system is not neglected. The “macro” in macroprudential is not synonymous with macroeconomic but, as I have said, points us towards thinking of the financial system as a system. The members of the FPC need a knowledge base that, while overlapping, is different from that of the MPC. They need to know about the microstructure of the capital markets as well as about cyclical credit conditions.

See also the Bank’s paper: “The role of macroprudential policy: A discussion paper”, November 2009. 8  BIS central bankers’ speeches  The benchmark instrument, in the sense that it will definitely exist, will be the countercyclical buffer (CCB) in the Basel 3 Capital Accord. In the UK, it will be the FPC that decides whether to switch off the semi-automatic application of the CCB when triggered by the ratio of credit to GDP and other indicators exceeding certain thresholds. (It is not altogether clear, by the way, who will have that responsibility in other countries; the function requires a system-wide perspective and a macroeconomic capability and so is not exclusively in the domain of microprudential regulators.) Beyond the one instrument agreed internationally so far, the UK government is also considering whether to give the FPC a variety of other instruments. These include varying liquidity requirements; and varying capital requirements against specific types of exposure (“risk weights”) and/or minimum haircuts for specific types of secured lending, whether financing hedge funds etc or Loan-To-Value ratios for property-related lending. The availability of such targeted instruments might be especially useful where the FPC wished to mitigate risks from overexuberance and collective imprudence in lending to a particular sector without necessarily affecting credit conditions more generally. Targeting a specific area of business might also sometimes help to resolve a collective action problem sustaining a bubble if enough lenders themselves thought risk was being underpriced.