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About this book

This book reviews the key policy debates during the post-crash era, describing the issues that policymakers grappled with, the decisions that they took and the details of the policy instruments that were created. It focuses specifically on the policy regimes at the epicentre of the crisis: micro- and macro-prudential policy with chapters exploring the revolution in the conduct of macroeconomic policy in the period since the financial crisis. The author shows that throughout this period policymakers have had to balance two conflicting objectives – to repair balance sheets in the banking and public sectors whilst simultaneously trying to catalyse an economic recovery – and that has required them to innovate new tools and even new policy regimes in response. This book goes behind the jargon and explains what exactly policymakers at the Bank of England, the Treasury and beyond did and why, from QE to austerity to Basel III.

Table of Contents

Frontmatter

1. Introduction

Abstract
This book is about the disciplines of economic policy that you never read about in an introductory macroeconomics textbook, never heard about in a lecture and probably never gave a passing thought to before the financial crisis: the regulatory and supervisory regime that covers financial institutions and markets in general and banks in particular. A companion volume focuses on the more familiar terrain of monetary and fiscal policy but even there, the issues that have confronted policymakers have been so unusual and the conduct of policy so unconventional since the crash that the typical introductory textbook sheds little light on the issues of the day.
Richard Barwell

Microprudential Policy

Frontmatter

2. The Causes of the Crash

Abstract
The financial crash and the economic depression that followed represented an existential crisis for the policy community and, in particular, for the regulatory and supervisory community—that is, those responsible for writing the rules which govern behaviour within the banking sector and broader markets and those responsible for implementing the rules.
Richard Barwell

3. The Crisis Response

Abstract
Between summer 2007 and winter 2008, the global financial system came close to complete collapse. The crisis did not develop in an entirely predictable linear fashion, with steady progress towards an inevitable end point, but through fits and starts, with policymakers responding to events as they unfolded, engineering moments of relative calm before stress returned. The rest of this book is about what happened after the crash, but a discussion of the broad contours of policy response in the 18-month period between the music stopping and the trough in financial markets surely merits its place in this book. In this section, we shall tell the story of that crisis response, with an unashamed focus on events and the policy response in the UK. The objective here is to document the detail of what was done just as much as why, since much of this detail was not widely discussed at the time, and what was known will soon fade from public memory. Given the inevitable space constraints, the reader will be directed towards key references which provide a more comprehensive treatment of specific measures.
Richard Barwell

4. Global Reform

Abstract
The crisis engulfed the banking systems of many of the advanced economies, exposing common flaws in the global regulatory framework. The policy response to the crisis was correspondingly global. In this section, we shall discuss the two key elements of the global policy response: the reforms to the international prudential standards and the attempts to solve TBTF.
Richard Barwell

5. Local Reform

Abstract
We now turn to focus on the key ingredients of the national reform agenda: the changes to the institutional architecture; the debate around structural reforms of the UK banking sector; and reforms to a key part of the wider policy regime (the BoE’s liquidity operations).
Richard Barwell

6. The Wider Prudential Policy Agenda

Abstract
Having debated the causes of the crash, described the policy response during the acute phase of the crisis and reviewed the key ingredients of the global and local reform agenda—raising regulatory requirements, dealing with too big to fail, contemplating structural reform of the banking sector and revisiting the terms on which central banks provide liquidity insurance—we will now turn to briefly discuss other aspects of the prudential agenda.
Richard Barwell

Macroprudential Policy

Frontmatter

7. The Macroprudential Agenda

Abstract
In this section, we will introduce the macroprudential agenda—the justification for this new policy regime and its objectives. As will become clear, while there is a consensus about the basic role of this new regime, there are important differences of opinion about the precise objectives of the emerging macroprudential regime, and the details of the framework have yet to be fully specified.
Richard Barwell

8. Turf Wars: The Relationship Between Macroprudential Policy and Other Policy Regimes

Abstract
In a perfect world, the pursuit of policy objectives in one domain of economic policy would not interfere with progress in another. Policymakers in the monetary, fiscal, micro- and macroprudential spheres could go about their business without a second thought for the consequences of their actions for the wider goals of economic policy or the potential for other policymakers to complicate their task. Unfortunately, we do not live in that perfect world: policymakers will be treading on each other’s toes, if not trampling on each other’s turf.
Richard Barwell

9. The Conventional Instruments of Macroprudential Policy

Abstract
Any instrument of economic policy should exhibit a number of key properties. First, the policymaker should have the legal authority to use the instrument and should not be constrained in its use. Second, that instrument should be effective, in that use of the instrument has a significant and sufficiently rapid impact on the objectives of policy. Third, that transmission should be stable and predictable, in that use of the instrument does not inject uncertainty into the system. Fourth, the instrument should be cost-effective, in that use of the instrument does not entail significant undesirable side effects for the broader goals of the social planner.
Richard Barwell

10. Unconventional Macroprudential Instruments

Abstract
The IMF’s organising framework for macroprudential policy (IMF 2011) concludes the following about the toolkit for the macroprudential regime:
Richard Barwell

11. MP-UK: Macroprudential Policy in Action in the UK

Abstract
We now turn to discuss how the macroprudential agenda has been put into action in the UK. For a discussion of what has been done elsewhere, see Cerutti et al. (2015) and the references therein. To be fair, the UK has been something of a pioneer in this area—with the Chancellor keen to forge ahead on establishing a macroprudential regime and a BoE Governor keen to shape the macroprudential agenda.
Richard Barwell

12. Macroprudential Policy and the UK Housing Market

Abstract
According to Hartmann (2015), boom–bust cycles in real estate markets have been a major factor in systemic financial crises in the past and therefore need to be at the forefront of macroprudential policy in the future. In this final section, we discuss the macroprudential interest in the housing market. We begin with a review of why housing matters and the rationale for macroprudential interventions, before turning to discuss whether developments in the UK housing market in the decade leading up to the crash posed a genuine threat to the resilience of the UK banks, and we end with an evaluation of three significant policy interventions in the UK housing market since the crash which neatly illustrates one of the key claims in this book—that numerous policymakers have an active interest in the macroprudential agenda.
Richard Barwell

Backmatter

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