Research underpins PRA policy, competitiveness, growth
David Bailey, Executive Director of the Bank of England's Prudential Regulation Authority, outlined how rigorous research informs policymaking. Speaking at the IFABS conference, Bailey emphasized its role in shaping the PRA's approach to competitiveness and growth.
Evidence for effective policy
Bailey highlighted that research brings academic rigor to policy questions, moving beyond immediate evidence to contribute to broader debates on regulation's economic impact.
He clarified that his speech aimed to explain how robust research helps make informed policy decisions consistent with statutory objectives, rather than presenting new policy.
Research illuminates policy mechanisms, quantifies cause and effect, and aids in identifying trade-offs, thereby setting effective policy priorities.
It also informs risk assessments, shapes understanding of firm responses, and underpins cost-benefit analyses, such as the PRA's macroeconomic CBA methodology for banks.
Post-implementation, research evaluates policy outcomes, tests assumptions, identifies unintended consequences, and ensures rules remain proportionate and effective.
Balancing resilience and growth
The PRA's secondary competitiveness and growth objective (SCGO) is framed by three foundations: maintaining trust in the UK financial system, operating efficiently, and being responsive to new developments.
Research is central to calibrating policies across these foundations.
For instance, Bank staff reviewed over 70 academic studies to inform the Financial Policy Committee's (FPC) optimal capital requirements benchmark, balancing crisis reduction benefits against lending costs.
This work, reaffirmed by the FPC, ensures capital levels support long-term UK growth.
Research also informed reforms to remuneration rules, identifying that the 'bonus cap' weakened the link between pay and risk-taking, leading to its removal.
A necessary, yet evolving tool
While research is foundational for robust regulation, its application to rapidly evolving areas like innovation remains challenging.
The inherent uncertainty in new products and limited historical data mean policy must still rely on expert judgment.
This highlights a continuous need for adaptive research methodologies to keep pace with financial sector developments.