Spud fails to grasp. You can’t use the one thing to control many different variables.
First, we would need a new Capital Management Act. That would give the Treasury powers to require registration and reporting of cross-border financial positions, to impose quantitative limits or charges on classes of flows (for example, short-term wholesale funding), and to direct the Bank of England and the regulators to use their tools to achieve those aims. The old Exchange Control Act is a precedent: it shows Parliament has done this before.
Second, the Bank of England’s remit would have to change. Alongside price and financial stability, it must have an explicit duty to maintain external and capital-flow stability. It would then be required to use macro-prudential tools, such as counter-cyclical capital requirements on foreign exposures, reserve requirements on short-term foreign liabilities, and limits on FX mismatches, to pursue that goal. Access to sterling liquidity could be restricted to institutions that comply.
Third, the PRA (Prudential Regulation Authority) and FCA (Financial Conduct Authority) rulebooks would need to be revised. All sterling payment, clearing and repo activity for UK residents should take place in supervised entities that disclose their beneficial ownership and meet new reporting standards on FX, derivatives and securities financing. Time-varying regulatory charges (otherwise known as a Spahn tax), which are the equivalent of a transactions tax, could be applied to destabilising, short-term financial flows. Highly leveraged non-banks reliant on foreign funding could face tighter liquidity and leverage rules as a result.
Finally, we should not underestimate the importance of transparency. A public register of major cross-border positions, linked to company accounts and trust disclosures, would itself change behaviour.
Yes but.
You can control capital flows, sure you can. You can control interest rates, sure you can. You can control the FX rate, sure you can. But you cannot control interest rates, capital flows and the FX rate all at the same time. This was the old complaint about Bretton Woods, recall? Sure we controlled the FX rate, we had capital controls and then interest rates were out of our hands – because we had to use them to manage the FX rate.
Sigh.