Another element is to ensure banks have sufficient loss-absorbing liabilities which can be “bailed-in” in the event of failure, to prevent losses being shouldered by tax-payers. The Financial Stability Board has agreed standards for such Total Loss-Absorbing Capacity (TLAC) for global systemically-important banks (G-SIBs). These standards are to be phased-in over coming years, to reach a minimum level of 16% from 2019, and 18% from 2022, of the resolution group’s risk-weighted assets, as well as 6% and 6.75% on a leverage exposure basis, respectively. Macroprudential Reform  These new or augmented microprudential standards have been supplemented with a set of new macroprudential measures. These focus on safeguarding the stability of the financial system as a whole (Tucker (2009), Bank of England (2009, 2011)). The most significant of these reforms have focused on three areas: macroprudential capital buffers; stress-testing; and shadow banks. Historically, capital standards have been static requirements. As part of Basel III, a new time-varying component of banks’ capital was added – the counter-cyclical capital buffer (CCyB). This recognises that 4  And a number of countries, including the UK, introduced leverage ratio capital requirements in the aftermath of the crisis. 5  For LCR, see BCBS (2013a): http://www.bis.org/publ/bcbs238.pdf; for NSFR, see BCBS (2014b): http://www.bis.org/bcbs/publ/d295.htm 5  All speeches are available online at www.bankofengland.co.uk/speeches  5  risks to the financial system vary over the credit cycle, typically being highest at its peak and lowest at its trough.

Incentives to game risk weights can be constrained by imposing floors and/or by using standardised approaches for certain categories of assets.22 Some countries already make use of such approaches, including the US, the UK, Germany, France and Spain. The stress-testing regimes operating in a number of countries are also a way of cross-checking, and backstopping, the models used by banks. In a world of uncertainty as well as risk, having this portfolio of approaches for dealing with avoidance incentives - some discretionary, others rule-like - makes sense. Evidence on the incentive effects of financial regulation is almost always drawn from looking at banks’ experience either side of a change in policy. By then, however, any unintended or undesirable consequences of this change will already have been felt. Regulatory policy is in a perpetual catch-up loop, the bloodhounds in pursuit of the greyhounds. In an ideal world, it would be possible to gauge in advance how a regulatory change may reshape incentives, in particular risk-taking or regulatory-avoiding incentives. One approach to doing so is to use experimental methods. Experiments have previously been used to examine how different pay structures affect loan officers’ risk assessment and lending decisions (Cole, Kanz and Klapper (2015)). They have also been used to examine the effect of specific interventions on behaviour in other areas of public policy (Halpern (2015)). Recently, the Bank of England has conducted a lab experiment to assess how the design of pay regulation may affect risk-taking behaviour and project search effort (Harris et al (forthcoming)).