How much it does so is, however, a matter of degree. If regulatory constraints act as control bounds on structurally defective business models, that strengthens the financial system, even if (indeed, precisely because) it constrains diversity. Empirical evidence suggests this latter effect dominated during the recent crisis. (ii)  Discretion versus Rules  The new architecture has introduced measures which are likely to make for a greater degree of supervisory or policymaker discretion in the setting of regulatory standards. This arises, most obviously, in the application of supervisory judgement to certain risks that banks face, to stress-testing and to macroprudential policy. Multiple regulatory rules have been augmented with considerable supervisory discretion. Viewed in the round, this new regulatory regime could reasonably be described as “constrained discretion”. Regulatory rules provide the constraint within which policymakers exercise discretion. In its broad contours, this new regulatory framework has some similarities with the prevailing monetary policy framework in a number of countries (Bernanke and Mishkin (1997)). These regimes have been found to be an effective way of balancing the pre-commitment necessary to avoid policy time-consistency problems with the flexibility necessary to respond to unforeseen circumstances (Arestis and Mihailov (2009), Borio (2010)). Equally, as in the monetary policy sphere, there is a question about whether this new regulatory regime strikes the right balance between regulatory rules and the degree of discretion with which they are operated.

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)).