The flipsides of more resilient dealers and markets in periods of stress may well be less leverage, less maturity transformation and lower dealer inventories in more normal periods. The balance is not easy to strike; we may need to readjust our approach as we learn. But the goal of these reforms is clear: to make securities financing markets resilient. Robust securities financing markets should help to stabilise rather than destabilise the financial system in the face of shocks. The reduction in dealer inventories has attracted a lot of comment, with questions about whether they will be willing and able to provide liquidity as market makers in falling markets on the same scale as in the past. But the role of dealers in providing stable financing to leveraged investors may be equally important. Those investors may be the most likely to see a market crash as a buying opportunity – but only if they are not over-leveraged and have access to borrowing from financially-sound dealers. Put another  4  http://www.bis.org/publ/bcbs270.pdf. 5  http://www.bis.org/bcbs/publ/d295.pdf. 6  http://www.bis.org/publ/bcbs238.pdf. 7  In October 2014, the FSB published Strengthening Oversight and Regulation of Shadow Banking: Regulatory framework for haircuts on non-centrally cleared securities financing transactions (http://www.financialstability board.org/publications/r_141013a.pdf). 4  BIS central bankers’ speeches  way, we want dealers and leveraged investors to be providers not demanders of liquidity in a crisis. References Gorton, G B, Metrick, A, & Xie, L (2014), The flight from maturity. No. w20027. National Bureau of Economic Research, 2014.

1 And third stress testing, to assess capital against the impact of macro-economic scenarios of current concern to policymakers, in the UK modelled partly using firms’ internal models and  1  http://www.bankofengland.co.uk/financialstability/Documents/fpc/fs_lrr.pdf. BIS central bankers’ speeches  1  partly our models. The results of our first concurrent stress tests of major UK banks and building societies will be announced next month. The new bank capital framework will cause banks to hold significantly more capital than the pre-crisis regime. Major UK bank capital requirements and buffers have increased around seven-fold once you take account of tougher definitions of capital, regulatory adjustments to asset valuations and higher risk weights as well as the more obvious increases in headline ratio requirements and buffers. But, to use the language of micro-economics, this significant change in regulatory capital requirements – the “relative prices” of different risks – will lead to substitution as well as income effects. Over time, banks will adjust their portfolios to changed capital requirements. The overall extent to which banks are better capitalised and the financial system is more stable will depend on the scale and nature of these adjustments. Any substitution effects are likely to be stronger if regulation is introduced inconsistently across countries. It is important that we continue to seek consistency in implementing internationally-agreed standards. One adjustment may be a shift in activity from banks to non-banks. That could be beneficial for financial stability: for example, where long-term market-based finance provides an alternative to bank credit.