UK's Financial Services Authority: The Search For Financial Stability

Financial Services Authority Managing Director Michael Foot discussed the questions What is "financial stability" and how do we get it?during the Roy Bridge Memorial Lecture given today.

Michael Foot noted that, in contrast to its monetary stability cousin, relatively little had been written about what constitutes financial stability. He defined it to include four key items:

• monetary stability in the sense of "stability in the value of money";
• an employment rate close to the natural rate for the economy;
• confidence in the operation of the key financial institutions and markets; and
• no relative price movements of real or financial assets, such as house prices or equities, that would in time undermine items one to three.

On this definition and drawing on work by the International Monetary Fund and academic authors he argued that: *Financial instability can have many causes but in a developed economy a combination of sharp reinforcing relative changes in house and equity prices can be particularly dangerous

• Financial instability has been an increasingly common phenomenon around the world in the last 25 years, compared with earlier periods
• But the UK has enjoyed a decade of financial stability since the early 1990s
• The tripartite structure of Treasury, Bank of England and FSA - each with clearly defined roles and accountabilities - which was put in place by the Government in 1997 has helped to underpin this.

And the FSA has from the start accepted that maintaining market confidence - one of its four statutory objectives - relates directly to financial stability.