It is against this backdrop that policymakers internationally have engaged in a deep and wide rethink, rewrite and reform of the global regulatory rules of the game. Wide, reflecting the multi-faceted nature of the problems, market failures and market frictions exposed within the financial system during the crisis. Deep, reflecting the severity of the hit to balance sheets, risk appetite and economic activity that the crisis has inflicted and continues to inflict. The next section reviews these regulatory reform efforts and their impact on bank balance sheets and market metrics of banking risk. With a number of reforms yet to be fully enacted, it is too soon to be reaching definitive conclusions. Nonetheless, some of the key questions thrown up by these regulatory reforms conceptual, empirical and practical - are now reasonably clear. We also have almost a decade’s worth of additional evidence and research on which to draw when assessing these issues. The following sections discuss some of those issues, drawing on new research and evidence: the calibration of regulatory standards, balancing the costs and benefits of tighter regulation; the overall system of financial regulation, balancing underlaps and overlaps, simplicity and complexity, discretion and rules; the impact of reforms on incentives in the financial system, in particular incentives to avoid regulation; and the evolving role of macroprudential regulation in safeguarding stability of the financial system. The financial system is dynamic and adaptive. So any financial regulatory regime will itself need to be adaptive if it is to contain risk within this system.

Specifically, the experiment was designed to examine how caps on bonuses and “malus” (bonuses that are not paid out if, for example, performance falters in subsequent years) might affect individuals’ risk choices and efforts to seek out the best projects. The experiment showed evidence that, while both schemes tend to reduce risk-taking, they could be arbitraged relatively easily by introducing absolute or relative performance targets. There was also some evidence that a bonus cap might reduce incentives to search for good projects. The Bank of England is considering extending this experimental approach to a wider range of policy design questions and a wider range of financial market participants - risk-takers and risk-managers. In principle, this approach might provide some early indications of how new regulation might reshape risk incentives, including arbitrage incentives, which could help in recrafting regulation before it is introduced. Macroprudential Policy One of the greatest intellectual errors made in the run-up to the crisis was a classic “fallacy of composition”: it was assumed that the resilience of individual financial institutions was both a necessary and sufficient condition to ensure the resilience of the financial system as a whole. Events during the crisis, and  22  See BCBS (2016): http://www.bis.org/bcbs/publ/d362.pdf and BCBS (2013b): http://www.bis.org/publ/bcbs258.pdf 30  All speeches are available online at www.bankofengland.co.uk/speeches  30  subsequent theoretical and empirical work, has shown that the resilience of individual firms is neither necessary nor sufficient for the mitigation of systemic risk (Masera (2014), Crockett (1996)).