5 There are two key principles to keep in mind as we fine-tune regulations: risk proportionality and global consistency. Risk proportionality We need to be mindful of proportionality when applying international regulatory standards. Subjecting banks of different sizes, different scope of activity, and different degrees of internationalisation, to the same rules is not appropriate. Most of the new regulations were designed with large, cross-border financial institutions in mind. They are a poor fit for smaller institutions – like local community banks and finance companies – that tend to pose fewer systemic risks. Here in the US, there are concerns that post-crisis regulations have been unduly punitive on smaller banks and have affected their ability to support small businesses. Regulators need to review their frameworks to ensure they remain risk proportionate. They are not starting from a blank slate. In the US, for example, the Dodd-Frank Act already exempts firms with less than $ billion in assets from the tougher prudential requirements. And Bill Dudley, President of the New York Fed, has suggested: “… this threshold could be raised significantly without unduly increasing the risk to the broader financial system.” 6 Global consistency Adjustments to domestic regulation must not lead to inconsistency with agreed international standards. Global harmonisation of regulation enables fair competition and minimises regulatory arbitrage. Harmonisation does not mean identical rules. Country differences matter. We therefore need to establish effective mechanisms to recognise and defer to one another’s national regulatory regimes. Conflicting rules on cross-border OTC derivatives trading is a case in point.

The system has remained resilient through several episodes of market stress, ranging from the 2014 US Treasury “flash crash”, and the 2015 Swiss Franc de-pegging to the 2016 Brexit vote. What have been the overall effects of the reforms? Work in this area is nascent, there are no clear answers yet. But let me sketch some of the key issues. In each of these areas, we are confronted with the problem of attribution. It appears that regulation has had some role but we do not know how much of a role alongside other factors. Let me begin with market liquidity. There are concerns that liquidity has declined in some markets. Preliminary evidence indicates there is less depth and potentially less resilience under stressed market conditions3. Some of the blame has been ascribed to the emergence of more automated trading, which has little to do with regulation. 2/9  BIS central bankers' speeches  But other factors – such as less market making by dealer banks and increased post-trade transparency in corporate bond markets – appear to have stemmed from regulation. Second, bank profitability. The profitability of several large banks today is below the cost of capital. This is worrying. Banks need to be profitable in order to be strong. Retained earnings are one of the major sources of equity – which is the highest quality capital that banks hold. Unprofitable banks are a potential source of instability. Banks also need to be profitable to be able to support the real economy.