(e) Market-Based Finance: The emergence of a large and diverse shadow banking system, both prior to the crisis in the US and subsequent to it elsewhere around the world, plainly poses both considerable opportunities and potential threats to financial stability. So-called market-based finance provides the financial system with a second, non-bank, engine on which to fly which could be beneficial in a diversity 27  For example, the results of the Bank of England’s 2014 stress test found that risk-weight procyclicality was a significant contributor to the change in capital ratios in the stress test scenario (Bank of England (2014)). 37  All speeches are available online at www.bankofengland.co.uk/speeches  37  sense. Nonetheless, it also gives rise to potentially new sources of systemic risk and contagion, as risks change shape and location. The FSB has made significant progress in progressing the regulatory debate on such matters (FSB (2017e)). Certainly, these trends carry implications for both the conduct of regulation and for central bank procedures. A world of greater market and liquidity risk may call for different sets of regulatory instrument than the bank-based solvency and liquidity metrics of Basel III. Market-based instruments, such as margin requirements, may have a greater role to play (see, for example, ESRB (2017)). It may also call for different types of market intervention by central banks – different markets, different instruments, different counterparties. The crisis has already seen a mini-revolution in the design of liquidity facilities by central banks.

From a potentially very long list, we conclude by highlighting some of the areas where we think further research and practical exploration might be useful in the future debate on regulatory reform.25  (a) Optimal Levels of Capital: One of the most animated, on-going areas of regulatory debate is whether capital standards have been appropriately calibrated. Relative to the pre-crisis LEI study, current levels of capital requirements in most countries are below that calibration. The single most important reason for that is because the LEI study did not take into account the potential impact of non-equity sources of capital, specifically TLAC, in reducing the impact and probability of crisis. The key question, then, is whether these instruments prove to be as loss-absorbing in future situations of stress where bail-in becomes necessary. This issue is particularly relevant when it involves systemically-important institutions or sets of institution, when the costs of bailing-in (and bailing-out) are large and lumpy. At this early stage, the jury must still be out. On the one hand, historical evidence on bailing-in different types of notionally loss-absorbing bank liabilities in situations of systemic stress has not been encouraging, reflecting the acuteness of the time-consistency problem facing the authorities in these cases. On the other, new statutory resolution arrangements are much stronger than ever previously, and statutory TLAC requirements are now prescribed in advance. This means next time could plausibly be different. Given its importance to the overall capital calibration, this issue deserves further empirical and theoretical consideration.