Decisions about whether or not to make an adjustment will be made on the basis of a careful weighing up of evidence of benefits and costs. In doing this we need to bear in mind that regulatory costs will often be easier to quantify than the financial stability and safety and soundness benefits. And depending on the case we may need to look beyond the banking system to capture all of the costs and benefits. For instance, unintended consequences of bank regulation might be felt not in the banking sector but in financial markets, financial infrastructures, and other parts of the financial system. Principle 3: we should aim to match a dynamic adjustment to the problem that has been identified. If we identify an unintended consequence of a particular regulation we should first seek to adjust that regulation to deal with the consequence. Similarly with any new risks that emerge. For instance, if a new risk that is identified is threatening the stability of the system as a whole it would seem appropriate to look to use a macroprudential tool to reduce that risk. Adjustments we have made already  The Bank has already made several changes to the regulatory framework that can be thought of as dynamic adjustments. Two such changes have been made to the leverage ratio requirement. In response to a recommendation by the FPC, central bank reserves have been removed from the calculation of the denominator of the leverage ratio since summer 2016.

The latest Financial Stability Report published last week sets out the Financial Policy Committee’s approach to establishing standards for the resilience of the delivery of vital financial services to cyber incidents. 21  And, tomorrow, the PRA, the Bank in its capacity of supervising financial market infrastructures, and the FCA will be publishing a discussion paper on operational resilience. Dynamic adjustments  As set out earlier, the reforms that were agreed following the crisis were remarkable in scope. They have delivered a much more financially resilient system, both in the United Kingdom and globally. 20  See a speech by Lyndon Nelson, ‘Resilience and continuity in an interconnected and changing world’, 13 June 2018, https://www.bankofengland.co.uk/-/media/boe/files/speech/2018/resilience-and-continuity-in-an-interconnected-and-changing-worldspeech-by-lyndon-nelson.pdf?la=en&hash=3DFD465DE00C545FA39255384DD660AF7B0C8A9F. 21 See Box 1, p.40 of https://www.bankofengland.co.uk/-/media/boe/files/financial-stability-report/2018/june2018.pdf?la=en&hash=9D057C7302B80EF57D634020F50C6F46D782904C. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Furthermore, some of the reforms were put in place quickly. They were also developed concurrently. Therefore it would be flabbergasting if the reforms did not have some unintended consequences. Unintended consequences might arise from the way regulations interact with each other. Because reforms were developed at the same time, some interactions may not have been identified as policies were negotiated. I referred to one type of unintended consequence already. Banks will seek ways to lower regulatory requirements even in ways that do not actually reduce the risks they face (‘regulatory arbitrage’). Plus, the financial system will evolve over time.