The FPC takes into account a variety of market characteristics (such as interconnectivity and concentration) and weaknesses in MBF sector (such as as leverage, liquidity and maturities mismatch, and market mismatch) as part of its framework for assessing risk. For example, disruptions to systemically significant economies and organizations that have an impact on businesses and households are one way that such vulnerabilities and features could collaborate and spread throughout the system to endanger financial stability.
Because the MBF system is global in scope, complicated, and highly linked, macroprudential authorities around the world face a number of real-world difficulties.The data that is currently available to evaluate the system’s financial stability risks has some significant gaps as well. Therefore, expecting that all hazards may be foreseen in advance is not reasonable.
Where the FPC discovers material weaknesses, it takes into account how shock-resistant certain markets and sectors are given those weaknesses. In the absence of appropriate resilience, the FPC aims to eliminate or significantly decrease risks to economic security by enhancing system resilience.
Market players must handle the risks they encounter first and foremost, with the help of the appropriate sectoral regulators.
Even though individual activities appear to be sensible when viewed in isolation, the aggregate actions of players in reaction to shocks can damage other enterprises, produce and transfer stress to financial markets, and result in the disruption of the financial services provided to the actual economy.
The goal of resilience standards and, more broadly, macroprudential regulation is to stop such systemic risks from disrupting the delivery of financial services. Since both individualistic and systemic risk must be covered, effective resiliency for market-based financing must be set to suitable levels, such as for a severe yet conceivable stress.
To promote the long-term health of the UK economy, the FPC has the duty to spearhead policy development and execution on a national and international level.
When domestic action is projected to strengthen UK financial security, may inform or hasten the formulation of international policy, and would not have a detrimental effect on global financial stability, the FPC takes it into consideration alongside or independent from international action. This is significant for both the UK economy and the global economy because London is one of the biggest international financial centers in the world. According to the International Monetary Fund, or IMF, the UK financial system’s stability is a worldwide public good.
At the exact same time, it’s critical to understand that trying to develop resilience in order to prepare for every conceivable scenario is neither realistic nor credible.