How does the Bank of England ensure financial stability?

The Bank of England ensures financial stability primarily through the formation of the Financial Policy Committee (FPC), which plays a critical role in identifying, monitoring, and addressing risks to the financial system as a whole. The FPC's responsibilities include assessing systemic risks, making macroprudential policy recommendations, and implementing measures that can help curb these risks when necessary. This proactive approach allows the Bank of England to address vulnerabilities before they can negatively impact the economy and financial system.

The FPC operates by setting policy tools aimed at strengthening financial institutions and maintaining overall confidence in the financial system. It engages in stress testing and monitors various indicators to determine the health of the banking sector and other financial entities. Ultimately, the FPC's focus on systemic risk ensures that the financial environment remains robust and less susceptible to shocks.

The other options do not encompass the comprehensive approach taken by the Bank of England. Adjusting interest rates can influence economic activity but is not a direct mechanism for maintaining financial stability. The Financial Conduct Authority (FCA) operates within a more regulatory environment concerning market conduct and consumer protection, which while important, does not solely ensure financial stability. Increasing cash reserves may act as a measure of liquidity for banks but does not address broader systemic risks in the financial system.