11  All speeches are available online at www.bankofengland.co.uk/speeches  11  And I hope you will respond to my call to arms for your research to aid the development of that guide, because we are a very long way from the last word. We are not even at the first words of the last chapter. How to: macropru, is at best reaching the last words of its first chapter. I look forward to helping to write the rest together. Thank you. 12  All speeches are available online at www.bankofengland.co.uk/speeches  12  References Bahaj, S., Bridges, J., Malherbe, F. and C. O’Neill (2016): “What determines how banks respond to changes in capital requirements?”, Bank of England Staff Working Paper 593. http://www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp593.pdf Bahaj, S. and A. Foulis (2016): “Macroprudential policy under uncertainty”, Bank of England Staff Working Paper 584. http://www.bankofengland.co.uk/research/Pages/workingpapers/2016/swp584.aspx Bank of England (2015a): “Record of the Financial Policy Committee Meetings 25 and 30 November”, 19-21, 9 December. http://www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2015/record1512.pdf Bank of England (2014): Financial Stability Report (June). http://www.bankofengland.co.uk/publications/Documents/fsr/2014/fsrfull1406.pdf Bank of England (2015b): Financial Stability Report (December). http://www.bankofengland.co.uk/publications/Documents/fsr/2015/dec.pdf Bank of England (2016): Financial Stability Report (November). http://www.bankofengland.co.uk/publications/Pages/fsr/2016/nov.aspx Baranova Y., Chen L. and N. Vause (2015): “Has corporate bond market liquidity fallen?”, Bank Underground. https://bankunderground.co.uk/2015/08/27/has-corporate-bond-market-liquidity-fallen/ Bardoscia, M., Brinley Codd, A., and J. Hill (forthcoming): “Solvency contagion through interbank exposures: modelling and mitigating systemic risk”, Bank of England Staff Working Paper BCBS (2010), ‘An assessment of the long-term economic impact of stronger capital and liquidity requirements’, August.

3) The system is not the sum of its parts My next principle concerns the stress tests themselves – where the stress scenario is applied to the system. It is to beware; the system is not the sum of its parts. Feedback loops within the system mean that the entities in the system can be individually resilient, but still collectively overwhelmed by the stress scenario. These are the feedback loops that helped to turn around $ bn of subprime mortgage-related losses into well over $ trillion of potential write-downs in the global banking sector within a year. 20  There are the obvious feedback loops that arise because entities have direct exposure to each other: think lending from one bank to another. The good news is that the importance of this loop is now negligible. Unsecured interbank lending has contracted and banks are materially less leveraged. 21  And this loop is now incorporated into our annual  banking system stress test, so should it ever re-assert itself, we can ensure resilience keeps up. But we need to go further. At the next level are the feedback loops that link seemingly unrelated entities in the system. These are loops created by firesales of assets into illiquid markets, driving down market prices, forcing others to mark down the value of their holdings. 22  This type of loop will be most aggressive when the fire-seller is funded through short-term debt. As asset prices fall, there is the threat of needing to repay that debt.