It is for the obvious reason that we need to preserve the key services that the financial system provides to the real economy: payments and transactions deposits; the intermediation of savings and investment via credit and equity; and insurance and risk transfer. In the latest crisis, the payment system was preserved but only at a massive cost to the taxpayer, and even then official support operations could not prevent the severe credit crunch that led to a horrible global recession. That is why we care. And it underlines the importance of ensuring that the system of credit intermediation (and risk transfer), not only the payment system, is robust. Instability and resilience But not every severe interruption in the provision of financial services is the result of instability. Instability is characterised by a problem in one of part of the financial system – a bank, a market, part of the infrastructure-spreading to other parts and threatening to spiral out of control. Financial systems are prone to bouts of instability, due to the inherent fragility of the balance sheets of many participants, together with the complex networks through which they are connected. First, many firms are highly leveraged, meaning that a given fall in the value of their assets has a magnified effect on their net worth; and run significant liquidity risks, so that they can face distress if their liabilities crystallise before their assets. Given opacity about their financial strength, this can leave such firms exposed to runs when the weather turns nasty.

We would have been attentive to the opacity around the ABS market; and to the cliff effects stemming from mechanistic reliance on rating agency ratings by banks, investors and regulatory regimes. And, finally, I trust that we would have been more exacting in following up the early-2000s’ G10/Financial Stability Forum report on the difficulties of resolving Large Complex Financial Institutions. Some of those interventions would have addressed long-standing structural faultlines in the global financial system. Others, perhaps more speculatively, would have been contingent on cyclical conditions. For example, a respectable macroprudential authority would ideally have tightened banks’ capital requirements against exposures to property and to shadow banking. Perhaps more compellingly, I think a macroprudential authority equipped with powers to do things would at least have asked whether the system was sufficiently resilient given a pervasive sense, from the market itself, that risk was underpriced. BIS central bankers’ speeches  7  Lo and behold, the sphere of influence of the FPC will come via both “structural” and “cyclical” instruments.7 Once the legislation is in place, the FPC will be able to make Recommendations, on a “comply or explain” basis, to the Prudential Regulation Authority and to the Financial Conduct Authority (the planned securities markets-cum-consumer regulator) on their rules and policies. And the FPC will also be able to Direct the microregulators to take certain kinds of action, to be set out in secondary legislation; that is so that our Parliament decides the spheres in which the microregulators will be obliged to follow the FPC’s lead.