How does the Bank of England ensure financial stability?

The Bank of England ensures financial stability primarily through its Financial Policy Committee (FPC). The FPC is responsible for identifying, monitoring, and taking action to mitigate systemic risks to the UK financial system. This includes assessing the health of financial institutions, the wider financial markets, and the economy as a whole. By using tools such as setting countercyclical capital buffers, the FPC aims to protect the financial system against potential risks and ensure that banks maintain sufficient capital during periods of economic stress.

While the other options suggest various methods of influencing the economy or banks, they do not accurately represent the specific mechanism the Bank of England employs to maintain financial stability. Increasing taxes is a fiscal policy tool and does not directly relate to the Bank's regulatory role. Approving all bank transactions contradicts the principle of allowing banks to operate independently while remaining under regulatory oversight. Monitoring retail banks exclusively would neglect the interconnectedness of financial systems and the importance of a broader approach that includes all aspects of the economy. Thus, the role of the FPC is central to the Bank of England's strategy for safeguarding financial stability.