In future, the Bank aims to be able to offer through the FSR some greater clarity to financial firms about the sorts of vulnerability scenario it thinks they could use as one (and only one) input to their stress-testing machinery. This might include both solvency and liquidity-type scenarios. As the FSA have proposed, banks should also test to destruction their balance sheets through “reverse” stress tests, in order to identify potential areas of balance sheet weakness. •  Second, regular evaluation of common stress scenarios. Having banks conduct regular evaluations of their positions relative to a set of common scenarios (provided by the authorities) would be an improvement on current practices in several respects. First, it would allow some degree of benchmarking of results across institutions; second, it would allow a degree of benchmarking, and hence peer review, of models; and third, it would hopefully help in ensuring stress-testing exercises form an input to management decisions and are not an annual regulatory ritual. Comparing these bottom-up exercises with top-down evaluations conducted by the authorities – the like of which have appeared in recent Bank FSRs – can also help in benchmarking results and models. •  Third, an assessment of the second-round effects of stress. The results of these common stress evaluations should be the starting point, not the end point. These common stress tests need to be made dynamic, so that the second and subsequent round interactions, and their consequences for system-wide risk, can be evaluated.

So there should be a presumption that the results of these dynamic stress tests are taken, for example, to banks’ risk committees. And banks’ executives should periodically be asked how they intend to respond to these findings, including how effective their defensive responses are likely to be when the stress is system-wide and how the results affect liquidity and capital planning decisions. •  Fifth, transparency to regulators and financial markets. The bank-specific results ought to inform regulatory decisions about firms’ capital and liquidity buffers. Indeed, there is a case for having these results set out regularly in firms’ public reports. This would hopefully help exert a degree of market discipline over management choices, as has been proposed by the Treasury Committee. 15 Existing disclosures by banks are a patchwork of different practices which make cross-firm comparisons of risk nigh on impossible. Having a standardised, published set of such stress-testing results would help improve financial markets’ understanding and hence pricing of bank-specific risk – a particular problem during this crisis – thereby helping address the external incentive problem. Working alongside the other Tripartite authorities, the Bank would be interested in exploring with financial firms the feasibility and desirability of putting this five-point plan into practice. This plan is about making stress-testing more robust but also more relevant. It is about providing that missing informational public good. In the arm-wrestle with management, it is about supplying power to the elbow of risk-managers. Conclusion Let me conclude.