They also support the case for clarity in the application of these regulatory policies. Not least given its newness, there may be further to go clarifying the motivation behind macroprudential interventions and the circumstances which might justify different macroprudential instruments - in short, in defining and refining the macroprudential policy reaction function. The UK’s Financial Policy Committee has made some progress in this area, most notably in setting out its strategy for using the countercyclical capital buffer (Bank of England (2016a)). A discussion of the principles underlying the UK’s approach to macroprudential policy can be found in Brazier (2017a). The benefits of pursuing this path are clear from monetary policy experience (Brazier (2015)). Increasing the predictability of policy can enhance the ex-ante signalling and expectations channels of regulatory policy, as has been achieved in relation to monetary policy (Bernanke and Mishkin (1997)). It enhances ex-post accountability to stakeholders, political and societal. And it reduces the potential behavioural biases otherwise associated with discretionary decision-making and which have been found in the past to affect discretionary regulatory policy, including regulatory capture (Dal Bó (2006)) and defensive decision-making (Gigerenzer (2014)). At the same time, there is clearly a balance to be struck. As Greenwood et al (2017) argue, strict rules-based systems are likely to be arbitraged and exploited by banks. For example, recent theoretical work and experimental evidence suggests remuneration contracts can be restructured to recreate the excessive risk-taking incentives that new rules seek to reduce (Thanassoulis and Tanaka (2017), Harris et al (forthcoming)).

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.