A comprehensive annual stress-testing exercise is now undertaken in the US.6 More recently, the US has been joined by the UK and the EU, among others.7  Finally, one of the striking features of the pre-crisis financial system was the emergence of the so-called “shadow” banking system. In the US, on some definitions, this grew to exceed in size the conventional banking system (Pozsar et al (2010)). Since the crisis, reform efforts have focused on two areas. First, specific reforms have been enacted to sectors which, during the crisis, were found to contain fault-lines - for example, Money Market Mutual Funds (IOSCO (2012)). Second, a framework has been put in place by the FSB to define and measure shadow banking entities, to publish data on them to enhance market discipline and to help authorities identify, and develop policy tools for mitigating, the risks they might pose (FSB (2013a)). The FSB have recently put forward a package of recommendations to address structural vulnerabilities from the asset management sector (FSB (2017d)). Supporting this package of regulatory reforms, micro- and macroprudential, have been initiatives to boost the quantity and quality of reporting by financial institutions. These should help in pricing institution-specific risk by financial markets and ratings agencies. Notable initiatives have included: enhanced Pillar 3 disclosures by banks, covering all aspects of the regulatory reform agenda; and the work of the Enhanced Disclosure Task Force (EDTF), a private sector group established by the FSB. Over time, this has led to increased compliance with the EDTF disclosure template (Chart 3).

12  All speeches are available online at www.bankofengland.co.uk/speeches  12  aftermath of a crisis by 0.1% – broadly consistent with the evidence here - this would raise optimal capital requirement by around 2 percentage points, other things equal.14  Working in the opposite direction, however, have been developments in resolution arrangements and new standards for TLAC. No account was taken of these in the LEI study. But if TLAC can be credibly bailed-in, including for systemically-important institutions, this would tend to reduce both the likelihood and severity of future crises.15 It may also discipline banks’ management, avoiding them taking excessive risks in the first place. Some studies suggest this market discipline effect could be material, reducing the likelihood of a financial crisis by as much as 30% (Afonso et al (2015), Brandao-Marques et al (2013)). Colleagues at the Bank of England (Brooke et al (2015)) have estimated that, if these measures of the beneficial incentive effects of TLAC and credible resolution regimes are correct, and if increased resolvability in addition reduces the cost of crises by around 60%,16 then optimal capital ratios for the UK banking system could be up to 5 percentage points lower than would otherwise be the case. A recent study by economists at the Federal Reserve Board (Firestone et al (2017)) also considers the impact of improved resolution arrangements. They use estimates from Homar and van Wijnbergen (2016) to model a reduction in the expected duration of crises from such arrangements.