This helps to explain why at the Bank of England we are conducting a system wide stress exercise involving non banks as well as banks to help us to map out the risks. This is inherently a cross-border issue. So, we must make progress internationally. This is what the Financial Stability Board work programme is focussed on, and why it is so important. It is also crucial that individual countries take forward and implement these reforms. While the solutions are global, delivering them will necessarily be local. Finally, there is an important point to pull out of a number of these issues. A common outcome of a shift in the balance from inside to outside money (either through CBDC or banks holding larger reserves at the central bank) or increasing the broader liquidity buffers of banks and non-banks could be to create a constraint on lending and investment in the real economy. For the UK economy this would go against the need to finance investment to support stronger potential growth, from its current weak level. This constraint would not appear if the counterfactual was an unstable financial system because solving that instability would have to be the priority. But in a more stable world public policy must still determine the best use of tools – for instance, advocating ever tougher stress tests and larger liquidity buffers in an attempt to cover future Black Swans is not obviously preferable to having tools by which central banks can make temporary and targeted interventions, as we did last October.

(2007): Overborrowing and Undersaving: Lessons and Policy Implications from Research in Behavioral Economics, Discussion Paper, Federal Reserve Bank of Boston; Heidhues P. et al. (2010): Exploiting Naivete about Self-Control in the Credit Market, American Economic Review 100; Laibson D. et al. (2000): A Debt Puzzle, NBER Paper No. 7879; Meier, Sprenger (2008): Charging Myopically Ahead: Evidence on PresentBiased Preferences and Credit Card Borrowing; Azfar O. (1999): Rationalizing hyperbolic discounting, Journal of Economic Behavior and Organization, Vol. 38. 9  Hume, D. (1739), A treatise of human nature. 4  BIS central bankers’ speeches  encouraging sign, as it shows that deleveraging is not always inconsistent with economic growth. Turning to the indebtedness of households, the diagnosis does not point to easy solutions. Thus, regulatory measures at the microprudential level that enforce stronger discipline on the supply side of credit are all-important. Complementary macro-measures aimed at preventing excessive exuberance should also be deployed. In this context, I am referring to interest rate policies which – whenever feasible – “lean against the wind”, but also to more targeted macroprudential measures which directly address the dynamics of the credit market. The countercyclical capital buffer is an important example. Besides, facing more directly the behavioural biases that are at the root of the problem requires an increased level of “awareness”. In the words of Shefrin (2012), raising people’s awareness means “reminding ourselves of our psychological fallibilities so that we can avert some crises and mitigate others”.10 More specific consumer protection regulations or system design measures come as a second step.