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ES10008- Economic Policy in the UK > Monetary Policy > Flashcards

Monetary Policy Flashcards

1
Q

What is the countercyclical capital buffer rate?

A

When cyclical systemic risk is judged to be increasing, institutions should accumulate capital to create buffers that strengthen the resilience of the banking sector during periods of stress when losses materialise

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2
Q

Who sets the countercyclical capital buffer rate?

A

The FPC

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3
Q

This July, what is the countercyclical buffer rate said to be increasing to?

A

1% to 2%

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4
Q

What do sectoral capital requirements (SCRs) enable the FPC to do?

A

Temporarily increase capital requirements on exposures to specific areas

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5
Q

Give an example of an SCR.

A

If the FPC judged that exuberant commercial property lending posed risks, it could increase SCRs on commercial property loans, so that banks were required to have more capital agaisnt such exposures

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6
Q

What is a leverage ratio requirement?

A

Limits exposure relative to capital base, helping them to absorb losses and remain solvent

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7
Q

Who can the FPC set a leverage ratio requirements on?

A

Banks, building societies, and PRA regulated investment firms

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8
Q

What is the UK’s central bank?

A

The Bank of England

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9
Q

What are the core purposes of the BoE?

A

Monetary stability and financial stability

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10
Q

What does monetary stability mean?

A

Stable prices and confidence in the currency

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11
Q

What is monetary policy intended to provide a framework for?

A

Non-inflationary economic growth

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12
Q

What part of the BoE seek to keep the inflation rate at the recommended rate?

A

The Monetary Policy Committee (MPC)

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13
Q

How does the BoE play a vital role in maintaining financial stability? (7)

A
  • Reinforcing trust and confidence in money itself
  • Supervising financial market infrastructure
  • Removing or reducing risks to the financial system as a whole
  • Acting as lender and market maker of last resort at times of financial stress
  • Promoting the safety and soundness of individual financial institutions
  • Safely resolving failing financial institutions
  • Collaborating with other financial authorities.
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14
Q

Between 1997 to March 2013, who was responsible for the stability of the financial system as a whole?

A

The BoE

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15
Q

Between 1997 to March 2013, who supervised individual banks and financial organisations?

A

The Financial Services Authority (FSA)

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16
Q

What was the high level Standing Committee between 1997-March 2013, and who was it composed of?

A

Representatives from the BoE, the FSA and HM Treasury was supposed to develop a common position on any problems

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17
Q

What part of the BoE contributed to the Standing Committee?

A

Financial Stability Executive Board

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18
Q

Why was a new regulatory framework created in April 2013?

A

Due to the framework failing to identify problems that led to the Financial Crisis of 2007-09

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19
Q

What is the BoE main policy institution in the area of financial stability?

A

The Financial Policy Committee (FPC)

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20
Q

What is the primary objective of the FPC?

A

Identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system

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21
Q

What is the FPCs second objective?

A

Support the economic policy of the government

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22
Q

How many members are there in the FPC?

A

13

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23
Q

Who are the members of the FPC?

A
  • Governor
  • 4 x deputy Governors
  • Executive Director for Financial Stability Strategy and Risk
  • CEO of FCA
  • 5 x external members
  • Member from HM Treasury
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24
Q

Where do the 4 x Deputy governors of the FPC come from?

A

Financial Stability,
Markets & Banking,
Monetary Policy
Prudential Regulation (i.e., the CEO of the Prudential Regulation Authority, PRA).

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25
Q

What is special about the HM Treasury member of the FPC?

A

They are a non-voting meber

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26
Q

What is cross-membership of the FPC and the MPC designed to promote?

A

Consistency between financial regulation and monetary policy

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27
Q

What are the 5 FPC instruments?

A

Countercyclical capital buffer rate

Sectoral capital requirements

Leverage ratio requirement

Loan-to-value and debt-to-income limits for UK mortgages on owner-occupied properties

Loan-to-value and interest-cover-ratio limits for UK mortgages on buy-to-let properties

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28
Q

What are loan-to-value, debt-to-income, and interest-cover-ratio limits require?

A

Require regulated lenders to place limits on residential mortgage lending

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29
Q

What is the interest coverage ratio?

A

The ratio of expected rental income from a buy-to-let property to the estimated mortgage interest payments over a given time period

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30
Q

What does stress testing allow for and who contributes to the framework?

A

Stress tests allow the FPC and the PRC to assess banks’ resilience and make sure they have enough capital to withstand shocks, and to support the economy if a stress does materialise

FPC and the Prudential Regulation Committee (PRC)

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31
Q

What is ring fencing?

A

Separates banks’ retail banking activities from their wholesale and investment banking activities

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32
Q

What is the PRA responsible for?

A

Prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms

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33
Q

What are three objectives of the PRA?

A

(i) to promote the safety and soundness of these firms; (ii) for insurers, to contribute to the securing of an appropriate degree of protection for policyholders; (iii) to facilitate effective competition.

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34
Q

What institutions does the PRA focus on?

A

Institutions and issues which pose the greatest risk to the stability of the financial system.

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35
Q

What is the PRA apart of?

A

The BoE

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36
Q

What policy is the PRC responsible for?

A

PRA policy

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37
Q

What generally in terms of firms is the PRC responsible for?

A

The most significant supervisory decisions about individual financial firms

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38
Q

Who are the members of the PRC?

A

Governor (chair)

Deputy Governors for Financial Stability, Markets and Banking, and Prudential Regulation

Chief Executive of the Financial
Conduct Authority (FCA)

Six other external members, selected for their experience and expertise in financial services

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39
Q

Is the Financial Conduct Authority (FCA) apart of the BoE?

A

No, it is a separate institution

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40
Q

What is the FCA responsible for?

A

For promoting effective competition, ensuring that relevant markets function well, and for the conduct regulation of all financial services firms

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41
Q

Who does the FCA operate the prudential regulation of?

A

Those financial services firms not supervised by the PRA, such as asset managers and independent financial advisers

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42
Q

Monetary policy is conducted according to 5 key principles, outline them.

A

Clear and precise objectives

Flexibility

Openness and transparency

Accountability

Credibility

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43
Q

What is the primary objective of monetary policy?

A

Price stability

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44
Q

What is the UK’s inflation target?

A

2% +/- 1%

45
Q

What is meant by the monetary policy needing to show openness and transparency?

A

Publications of MPC members’ voting records, publication of the minutes of MPC meetings and publication of the BoE’s quarterly “Monetary Policy Report

46
Q

Who are the BoE accountable for?

A

Government, parliament and the wider public

47
Q

What is the inflation target expressed in terms of?

A

The CPI

48
Q

What happens if inflation is 1% above or below the target?

A

The Governor must explain in an open letter to the Chancellor the reasons for the deviation and what the BoE intends to do to ensure inflation comes back to target.

49
Q

What study suggests 2% is not the optimal inflation rate?

A

Bakhshi et al. (1999) study

50
Q

How does the BoE seek to meet the inflation target?

A

Setting short-term interest rates

Quantitative easing

51
Q

Who makes the two main policy decisions in the BoE?

A

The MPC

52
Q

When was the MPC established?

A

1997

53
Q

How many members are there in the MPC?

A

9

54
Q

Who are the 9 members of the MPC?

A

Governor

3 x Deputy Governors
- Monetary Policy
- Financial Stability
- Markets and Banking

  • Bank’s Chief Economist
  • 4 x external members
55
Q

Who appoints the external members of the MPC?

A

The chancellor

56
Q

Who also sits in on the MPC meetings?

A

A representative from the Treasury

57
Q

What is the purpose of the Treasury member sitting in on MPC meetings?

A

To ensure that the MPC is fully briefed on fiscal policy developments and other aspects of the government’s economic policies and that the Chancellor is kept fully informed about monetary policy

58
Q

What is the average time-lag of monetary policy?

A

2 years

59
Q

When did the BoE become operationally independent?

A

1997

60
Q

How is the BoE independence to conduct monetary policy limited?

A

In extreme circumstances, the national interest demands that the government has the power to give instructions to the BoE

61
Q

Who appoints MPC Governors and Deputy Governors of the BoE?

A

The crown, selected by government

62
Q

Can members of the MPC be reappointed?

A

Yes

63
Q

What are the pros of the BoE having operational independence? (2)

A

The MPC has more expertise than the government.

To some degree, the BoE is protected from potential pressure by the government to pursue a lax monetary policy

64
Q

What are the cons of the BoE operational independence?

A

The BoE’s independence is substantially limited in various ways

65
Q

How many times does the MPC meet a year?

A

8 meeting rounds consisting of 3 meetings per round

66
Q

When is the inflation target announced?

A

At the annual budget statement

67
Q

Subject to the primary target of hitting the inflation target, what is the MPC required to support?

A

The government’s economic policy, notably its objectives for growth and employment

68
Q

Is the BoE allowed to buy government debt?

A

Yes

69
Q

What are monetary aggregates?

A

Broad measures of how much money exists in an economy at various levels, including currency, deposits, and credit.

70
Q

What is the M0 money aggregate?

A

This is the narrow measure of money and consists of:
- Notes and coins outside the BoE
- Bankers’ operational deposits with the BoE

71
Q

What is the M4 monetary aggregate?

A

This is a broad measure of money and consists of:
- Notes and coins held by the M4 private sector
- All M4 private sector retail and wholesale sterling deposits at MFIs in the UK

72
Q

What is M4 closely related to? (2)

A

Aggregate demand and inflation

73
Q

What is the downside of M4 and why?

A

BoE can’t control it very easily. Commercial banks can influence it heavily through issuing loans.

74
Q

Who controls M0?

A

The BoE

75
Q

What is larger, M0 or M4?

A

M4

76
Q

What are the three conventional instruments of monetary policy?

A

Operational Standing Facility

Short-Term Repo Operations

Long-Term Repo Operations

77
Q

What are the 4 unconventional instruments of monetary policy?

A

Discount Window Facility

Contingent Term Repo Facility

Quantitative Easing

Forward Guidance

78
Q

What are operational standing facilities?

A

Operational standing deposit and lending facilities that are available overnight only and may be used on demand to banks.

79
Q

What are the normal lending/deposit rates at?

A

25 basis points higher/lower then the bank rate

80
Q

What is the main purposes of the operational standing facility? (2)

A

To help stabilise market rates close to bank rates.

Help banks manage unexpected payment problems.

81
Q

What is a repo?

A

Repurchase agreement- selling an asset to another party and agreeing to buy the asset or a similar asset back at a specified time in the future

82
Q

What is the main advantage of a repo operation for the BoE?

A

Injects central bank money into the banking system for a limited period

83
Q

What do short-term repos allow for?

A

Allow banks to borrow central bank reserves from the BoE for a one week period in exchange for high quality, highly liquid assets.

84
Q

How long are short-term repos?

A

One week

85
Q

How are short term repos carried out?

A

via auctions on a weekly basis

86
Q

What are short-term repos paid at?

A

Bank rate

87
Q

What is the supply of short term repos from the central bank said to be?

A

Unlimited supply

88
Q

What is the period for long-term repo operations?

A

Six month period

89
Q

How often does the BoE conduct long-term repos?

A

Either weekly or monthly

90
Q

How do banks apply for long term repo operations?

A

Banks submit bids in terms of spreads to the Bank Rate. The higher the spread they bid, the more likely it is that the BoE will allocate them these funds

91
Q

What is discount window facility?

A

It allows banks to borrow form the BoE highly liquid assets (usually gilts) against liquid collateral in potentially large size and for a variable term

92
Q

Who is the discount window facility aimed at?

A

Banks experiencing a firm-specific or market-wide liquidity shock

93
Q

What incentivises banks to repay borrowing through the discount window facility?

A

The fee charged is set at a premium to the market

94
Q

What is the contingent term repo facility?

A

BoE can activate in response to actual or prospective market-wide stress of an exceptional nature

95
Q

What does the contingent term repo facility enable the BoE to do?

A

Provide additional liquidity to banks against the full range of eligible collateral

96
Q

What is collateral?

A

If a counterparty fails to repay when due, the BoE can sell or retain the collateral to make good any loss it may face

97
Q

What are the 3 sets of collateral?

A

Level A: Highly liquid and quality sovereign securities

Level B: Liquid, high quality sovereign, supranational, mortgage and corporate bond

Level C: Less liquid securities and portfolios of loans

98
Q

When the BoE lends to its operations, it does so against…

A

…Collateral

99
Q

In short term monetary policy oeprations, what type of collateral is used?

What about longer term?

A

Level A

All levels

100
Q

How does the BoE protect itself against falls in the value of collateral?

A

They lend less than the market value of the collateral (haircut)

Lower level collateral is subject to larger haircuts

101
Q

What happened in March 2009 in terms of QE?

A

The MPC decided to undertake a series of asset purchases, in order to give a monetary stimulus to the economy

102
Q

What is the main purpose of QE?

A

To reduce borrowing costs and boost spending

103
Q

How does QE work?

A
  1. BoE electronically creates new money and uses it to purchases gilts from private investors such as pension funds and insurance companies
  2. Normally , these investors do not want to hold onto this money, because it yields low returns
  3. These investors now purchase other assets, such as corporate bonds and shares
  4. This lowers the return on these types of bonds and shares
  5. This lowers longer-term borrowing costs and encourages the issuance of new equities and bonds that should stimulate spending
104
Q

What happens to all the interest earned on the gilts from QE by the BoE?

A

All interest earned by the BoE is given to the government

105
Q

What are shoe-leather costs?

A

The costs that people incur to minimise their cash holdings during times of high inflation

106
Q

What is fiscal drag?

A

The deflationary effect of a progressive taxation system on a country’s economy. As wages rise, a higher proportion of income is paid in tax

107
Q

When was forward guidance introduced?

A

August 2013

108
Q

What is forward guidance?

A

Refers to the communication from a central bank about the state of the economy and likely future course of monetary policy.

ES10008- Economic Policy in the UK (3 decks)

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