THE SEARCH FOR FINANCIAL STABILITY

3 Apr 2003 05:45 PM

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.

NOTES TO EDITORS

1. Michael Foot, who is Honorary President of ACI (UK), gave the ACI(UK) Roy Bridge Memorial Lecture in London. The lecture is available on the FSA Webiste www.fsa.gov.uk.

2. ACI - The Financial Markets Association - was established in 1955 to represent foreign exchange dealers and interests. It now has around 16,000 members worldwide with affiliated financial markets associations in 66 countries and individual members in another 17 countries. ACI has the largest membership of any of the international associations in the wholesale financial markets.

3. Michael Foot has been a Managing Director at the Financial Services Authority since 1 June 1998 currently as Head of Deposit Takers and Markets Directorate. Previously he worked at the Bank of England joining in 1969 as an economist. His posts at the Bank included Head of Foreign Exchange Division, Head of European Division and Head of Banking Supervision Division. He became Deputy Director, Supervision & Surveillance in July 1994 and an Executive Director of the Bank in March 1996.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

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