Speaking at the international financial services forum in London, he said a “laying out” of future actions was crucial, stressing the FPC and PRA will be “very explicit” in their use of forward-looking judgmental tools.
Bailey said: “We are signalling that we will act to prevent the pro-cyclical tendencies of the past.
“Whereby lending and underwriting standards weakened in the good times and then suffered a knee-jerk reaction back when conditions deteriorated.”
Speaking of the One Bank policy, which will unite the Monetary Policy Committee, Financial Policy Committee and the PRA, he summarised that this will enable the different bodies to integrate objectives into a “single mission”.
He stated that in the past there has been too much dependence on monetary policy and not enough on macro-prudential policy
Bailey added: “You should interpret the changes to the Bank’s strategy and structure as very intentionally pushing the other way, to ensure that we are One Bank integrating our public policy objectives for one public good.”
A key part of the FPC’s stress test will be to examine the resilience of banks when there is a housing market shock and a snap back in interest rates, he said.
He welcomed action taken by firms on mortgage underwriting standards, stating this illustrates an example of where MPC, FPC and the PRA should work together.
Bailey added: “In our world, history shows that it takes a crisis to provide a decisive impetus to create and maintain the emphasis on the public good.”
“We have to work harder, and still have to do so to embed the idea that a stable financial system is a necessary condition for economic growth and other economic welfare benefits.”