To misquote Mark Twain, although crises do not repeat themselves they do rhyme. Long-lived institutions are likely to be better able to recall those ancient rhymes. Second, financial policymakers should ideally be arms-length from the political process – for example, operationally independent for regulatory tools. This reduces the temptation to trade off an asset boom today for a bust tomorrow. It helps delivers greater investment in future financial stability and greater insurance against fat tail risk. It helps avoid the ultimate deceit of mortgaging the unborn. BIS central bankers’ speeches  7  Third, financial policy needs to have a system-wide focus. In the jargon, it needs to be macro-prudential in nature (Crockett (2000)). That is essential in an integrated “robust-yetfragile” world where crises, when they come, are fat-tailed and global. Because it is systemwide, macro-prudential regulation may also help muffle the siren voices of vested interests, increasing the chances of an inclusive, rather than extractive, regime. In large measure, these institutional characteristics are reflected in the UK’s new regulatory arrangements. These came into place with the passage of the Financial Services Act (2012). Under this framework, responsibility for prudential policy falls to the Bank of England. It is split between the Prudential Regulatory Authority (PRA) carrying out micro-prudential regulation and the Financial Policy Committee (FPC) conducting macro-prudential policy.4 The new institutional framework for UK financial policy in many respects mirrors that for UK monetary policy. As with monetary policy, both the FPC and PRA have operational independence when setting certain prudential instruments.

There is a final twist in this story of the dark side of integration and information. Fat tails and short minds can combine in uncomfortable ways. Myopia generates under-insurance against future risks, especially tail risks which seem remote. Yet, courtesy of integration, these tail risks may be on the rise. In other words, systemic risks may be rising at precisely the time societal insurance against these risks is most needed. Why institutions matter If so, then policymakers face a dilemma – catastrophe risk rising, but catastrophe cover falling. In these circumstances, the public good of system stability, locally and globally, socially and economically, may be at risk. How should policymakers respond? One response would be to turn the tide, reversing the paths of integration and information. Since the crisis, there have been some signs of just that. Chart 2 shows one measure of global capital market integration over the past century – the correlation between national saving and investment rates in a set of countries. A value of one signals financial autarky – countries fully reliant on domestic saving to finance investment. A value of zero signals perfect financial integration – countries financing local investment globally. For much of the 20th century, global financial integration, so measured, was very low. In the early 1980s, after decades of post-war financial liberalisation, this was seen as a “puzzle” (Feldstein and Horioka (1980)). Yet at precisely that point, the puzzle began to unravel. Correlations between national saving and investment began falling.