Aside from the substantial communication and operational challenges involved, the very generous liquidity conditions established over more than a decade could have generated pockets of vulnerability in the financial sector, as the discipline on position-taking and balance sheet management imposed by liquidity constraints in normal times had been relaxed, at least for a time.5 To manage these concerns, the MPC set out a transparent strategy for normalising monetary policy centred on its plan to run down the stock of assets accumulated through QE in a gradual and predictable manner.6 This plan has governed the quantitative tightening (QT) programme over the past year. Addressing new inflationary shocks But monetary policy cannot be put on an autopilot. Any plan has to be conditional on economic conditions, and responsive to economic shocks and disturbances.7 The MPC has flagged that it will use Bank Rate as its active instrument to address new shocks as they emerge, leaving the QT programme to run ‘in the background’ as long as market conditions permit. Bank of England  Page 6  That naturally brings me to the second rationale for the substantial tightening of the monetary policy stance over the past year: the incidence of new inflationary shocks. Two shocks in particular stand out: the very sharp rise in wholesale European gas prices over the past year; and the decline in participation in the UK labour market (against a backdrop of sagging market competition in the goods market). The rise in gas prices has four important characteristics. First, it genuinely was a shock.

However, to meet the requirements applicable from the beginning of 2020 – i.e. after the phase-in period – action will need to be taken. This is particularly the case as regards meeting the leverage ratio requirements, but also as regards gone-concern instruments. The latter are used to recapitalise a bank in the event of imminent insolvency without recourse to government support. This is achieved by writing off designated debt instruments or converting them into equity. In addition to the reforms at national level, reforms are also underway on the Basel Committee on Banking Supervision’s international capital framework. It is likely that riskweighted assets will increase as a result of these international reforms. This expected increase has, as far as possible, been factored into the calibration of the revised Swiss ‘too big to fail’ regulations. All of these reforms – especially the higher leverage ratio requirements – will result in a further strengthening of the Swiss big banks’ resilience. In light of the fact that, in an international comparison, these two institutions are particularly large relative to the economy, this strengthening is necessary for two reasons. First, the big banks’ loss potential relative to their capitalisation is substantial. Given their significance to the Swiss economy, it is important that the big banks remain adequately capitalised, even in the event of such losses occurring. Second, while leverage ratios at both Swiss big banks have improved by international standards, they are still below the average for large globally active banks. The SNB welcomes and supports these reforms.