Macro-prudential policy protects the financial system from itself and the wider economy from its consequences. The FPC’s actions to date have been completely consistent with those objectives. For example, it has called for UK banks to increase their capital levels to safeguard their future resiliance. It has also relaxed liquid assets requirements for UK banks to support future growth. Through these actions, the FPC has sought to protect the financial system from itself and the wider economy from its consequences. In future, the FPC will have at its disposal a Countercyclical Capital Buffer (CCB) and Sectoral Capital Requirements (SCR). These are designed explicitly to lean against financial cycles. Like monetary policy, they operate symmetrically to constrain credit booms and cushion busts. They help safeguard today’s younger generation from the impatient grasp of their parents and grandparents, to avoid the ultimate deceit. The FPC can also invest in financial public goods – for example, new financial infrastructure to support resilience. In the past, central banks helped build market infrastructures such as payment, clearing and settlement systems to support resilience. Like lampposts and  4  8  The Financial Conduct Authority (FCA) is the third point of the regulatory triangle of the UK. It has responsibility, among other things, for consumer protection. BIS central bankers’ speeches  language, these are classic public goods. In future, the FPC may wish to help build other types of market infrastructure – for example, securitisation markets – to help create a more diverse financial system.

For Ronald Coase and Douglas North, institutions helped solve information and co-ordination problems within organisations, communities and societies (Coase (1960), North (1981)). The more complex these information problems, the more important were institutions as staging posts to efficiency and progress. For Mancur Olson, institutions could be a bulwark against the power of vested interests (Olson (1982)). Vocal minorities could block reform which would otherwise benefit the silent majority – for example, through tougher anti-trust law and tighter regulation. Institutions, arms-length from these vested interests, could break that reform logjam and thereby act as a growth facilitator. A common denominator among all of these thinkers, from Smith to Veblen to Coase to North, is that institutions rise in importance as societies become more complex, integrated and information-rich. Indeed, by embedding knowledge from the past, and investing in public goods for the future, institutions were essential prerequisites for continuing progress in such systems. Recently, those basic insights have been corroborated by historical evidence. Institutional quality has been found to be a key determinant of economic growth, particularly during financial liberalisation (Kose et al. (2006)). For Acemoglu and Robinson (2012), institutions play the pivotal role in explaining “Why Nations Fail”. In an echo of Olson, they distinguish extractive (catering for an elite) and inclusive (catering for society) regimes, with the first a recipe for economic regress, the latter for progress. Whether old or new, institutions seem to matter. Their secret lies in solving societal problems of knowledge, co-ordination and incentives.