Bank Of England Quarterly Bulletin 2014 Q4

‘Why is the UK banking system so big and is that a problem?’ notes that over the past 40 years the size of the UK banking system has grown dramatically – rising from around 100% to nearly 450% of nominal GDP – larger than the United States, Japan and the ten largest EU countries.[1]  Moreover, as the Governor noted in his October 2013 speech, under plausible assumptions it could continue to grow rapidly.  The article considers a number of reasons why the UK banking sector is so big.  It also presents some empirical evidence on the relationship between banking system size and financial stability which suggests that while financial sector size can be important, it is the resilience of the banking system that is key for determining financial stability. 

This edition also includes an article explaining the interaction of the FPC and the MPC.  The Bank’s Financial Policy Committee (FPC) and Monetary Policy Committee (MPC) are separate committees, each with their own primary objectives, but with a common secondary objective.  The article explains how each committee takes account of the other’s actions.  It concludes that there are clear benefits from having two separate committees, but there is also considerable scope for, and benefits from, effective information sharing between the FPC and MPC, and a shared understanding of each committee’s approach to policymaking.