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Defining financial stability

By my count, the British government’s new paper setting out its plans for overhauling the banking industry mentions the words “financial stability” 141 times in its 147 pages. So it comes as some surprise that the document makes no attempt to define the phrase.

The paper talks at length about restoring, maintaining and protecting financial stability. Its main proposal is to create a Council for Financial Stability, to be chaired by the Chancellor. Meanwhile the Financial Services Authority is to be given explicit responsibility for maintaining the stability of the financial system rather than just regulating individual banks.

Bank of England already has a Financial Stability Objective, and has set up a Financial Stability Committee to worry about it. But at no point has anyone said what this actually means.

The Banking Act 2009, which passed into law earlier this year, is not much help. In a particularly fine example of circular bureaucratic logic, the description of the Financial Stability Objective says the Bank of England should “contribute to protecting and enhancing the stability of the financial systems of the United Kingdom”.

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