The Bank of England’s job is to look after
the financial system as a whole. Legislation in 2013 gave the Bank more powers to tackle
risks and weaknesses across the system. The Bank stands ready to lend to institutions
that have a short-term need for extra money to manage payments. This is known as liquidity
insurance. In very difficult circumstances it can decide whether to offer temporary funds
as ‘lender of last resort’ to manage short-term cash problems.
The Bank also takes a lead role in dealing with severe problems at banks through the
Special Resolution Regime. It can help to sell, transfer or wind up failing institutions
depending on the nature of their problems. The market must be allowed to exercise its
own discipline and this means that it’s important that financial institutions are
allowed to fail when they are weak or badly run. But that needs to be orderly so it doesn’t
jeopardise the rest of the financial system and damage the economy.
That principle is important to the way the Bank of England regulates individual financial
institutions. The focus of the Bank’s work is to improve their safety and soundness so
that they are run in a safe way. The Bank also keeps a sharp lookout for risks
and vulnerabilities across the financial system as a whole, such as signs of over-exuberant
lending, or excessive use of risky financial instruments. This system-wide approach is
known as macroprudential policy. The Bank aims to ensure the system as a whole
can cope with being hit by problems. Banks have to be capable of absorbing losses so
public money isn’t needed to bail them out. So if risks are increasing, the Bank might,
for example ask banks to raise more capital as an extra buffer in case things go wrong.
All this puts the Bank of England at the heart of ensuring that the financial system is able
to deliver the key financial services to the wider economy and support economic growth
– in good times and bad.