On the first of these options, we would want to look at which requirements the smallest firms find the most complex. For example, if it turned out that small firms struggle with some of the complexities of our Pillar 2 framework for liquidity, could we simplify the framework for them? Alternatively, on the second option one could imagine a regime in which more liquidity requirements get added as a firm’s funding model becomes more complex (See Figure 3). Other countries around the world have taken various approaches to this simplification issue. For example, in Switzerland small banks are subject to simpler prudential requirements if they have high enough leverage 7  and liquidity ratios. Australian small banks are instead always subject to simpler risk-based requirements. 8  On the other side of the globe, the smallest Canadian banks are proposed to be subject to simpler risk-based  7 See for example: https://www.finma.ch/en/supervision/banks-and-securities-firms/kleinbankenregime/ 8 See for example: https://www.apra.gov.au/sites/default/files/response_to_submissions__revisions_to_the_capital_framework_for_adis_0.pdf 7  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  7  9  requirements as well as a more tailored liquidity requirement. Whereas in the rest of North America, most 10  US banks face increasingly more severe risk-based, leverage ratio, and liquidity requirements as they grow 11  in size. As you can see, it’s not at all obvious from this picture what is the right approach to simplification, and there will also surely be lessons to draw from how small firms deal with the current crisis.

There are also other factors not connected with the expectations that push up asset prices and can temporarily lead to the increase in demand that is created by exaggerated asset prices not being  2  BIS Review 43/2002  expressed as inflation and thus not being counteracted by tighter monetary policy. A high level of credibility for the central bank can also create low and stable inflation expectations, which can mean that inflation will not rise for a period of time, despite strained resource utilisation. Deregulation on globalised markets can also temporarily subdue inflationary pressure. Is there reason to change strategy? The question is whether it is possible to raise ambitions for monetary policy to prevent financial bubbles arising? Most people advocate a strategy where asset prices are merely taken into account to the extent that they affect inflation forecasts during the normal forecast horizon. However, there are also advocates of a strategy where monetary policy also prevents the occurrence and effects of financial bubbles. Those who maintain that monetary policy cannot counteract the occurrence of financial bubbles point out that the central bank has no possibility of determining whether or not asset prices are fundamentally motivated. They also point out that it is difficult to motivate an interest rate hike that is essentially aimed at counteracting an excessively large expansion in credit and an overly high real demand if the assessments of inflation do not at the same time show that the target level will be exceeded.