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These issues – low growth and high risk – are the bread and butter of central banking. These costs are not the fault of any party, whether businesses or investors or other stakeholders. Rather they are the result of the incentives embodied within the current structure of companies. These frictions are not just multiple, but potentially interact in important ways. When framing policy choices, that means heeding the “theory of the second best”, in the sense of Lipsey and Lancaster (1956)): with multiple frictions, taking measures to address a friction in one place need not necessarily lead to an improvement in social welfare in aggregate. As one example of that in a corporate governance context, the shift to equity-based compensation practices in the 1980s and 1990s addressed one incentive friction – the principal/agent problem between shareholders and managers. But it may have done so at the expense of amplifying other incentives frictions – for example, it may have amplified riskshifting incentives from shareholders to creditors and to wider society. In some areas, there has been considerable progress in tackling some of these incentive frictions since the crisis, especially among banking firms. One prominent example is regulatory capital reform. Significant increases in banks’ equity and loss-absorbing capital have been put in place or are planned. This is likely to have reduced the incentives of shareholders to engage in risk-shifting, either to creditors or to wider society, thereby lowering the macro-economic costs of these activities.