. last year ’ s stress test showed the major banks make losses of £44bn ; that ’ s substantially more than their losses at the height of the financial crisis. even after those losses, the system would have a capital base more than twice as strong as it had before the financial crisis ( chart 19 ). losses on consumer debt were an important driver of the test results. 20 % of their consumer loans went bad in the test, costing them £19bn, and adding to mortgage losses of £12bn ( chart 20 ). very sharp falls in used car prices would result in only small losses for the banking system. banks haven ’ t been the major players in this arena. even allowing for the loans they ’ ve made to car finance companies as th well as to car buyers, their exposures to the car market are just 1 / 5 of their credit card and personal loan books. having reviewed their practices, we know the banks ’ pcp deals tend to have a cushion between expected used car values and the final balloon payment. even a 30 % fall in used car prices, with all pcp contract cars handed back at the end of their term, would leave them with a loss of just £2bn. because they need to pass rigorous stress tests, the wider economy is being protected from the rapid growth of consumer debt. but it ’ s important that this defence line keeps pace with the risks. lower interest income on their loans, more interest free balance transfers and less capital allocated to consumer debt, may mean banks may have become, at the margin, a little weaker. and the rising level of consumer debt means it would be reasonable to expect greater losses on it in our future stress tests. that might mean the system has a bit more difficulty passing future tests. if that were the case, a further strengthening of the defence line would be needed. we have already, in recent months, taken steps to strengthen banks ’ defences against losses by raising the capital buffers they are required to hold on all their lending. that was achieved by increasing the ‘ countercyclical capital buffer ’ that banks must hold against their uk - related lending, from 0 % to 0. 5 % of risk - weighted assets, and expect to raise it further, to 1 %, in november. all speeches are available online at www. bankofengland. co. uk / speeches and to make sure this defence line is kept robust in the face of rapid consumer credit growth, we are accelerating this

acknowledge that the resilience of the financial system in general, and of credit institutions in particular, plays a key role in softening cyclical downturns. evident in this crisis has been the notable weakness with which many banks have faced the downswing. to increase their resilience, banking regulation policy can perform a pivotal function by curbing the countercyclical behaviour of capital, so that it protects banks and prepares them for the crisis. and to discuss this, i am bound in this second part of my speech to refer to rojo ( the spanish for red, and “ rot ” in german ). again, this is not only a type of wine but the name of the former governor of the bank of spain entrusted with steering and successfully ensuring the spanish economy ’ s entry into the euro area. it was also rojo who, in the final stage of his mandate as governor of the bank of spain, designed and put into practice the prudential regulatory mechanism of dynamic provisioning. this has contributed to reinforcing the stability of the spanish banking system and today commands wide recognition ; but, when initially launched, it aroused understandable rejection by spanish banks and was met with indifference on the part of the international community of banking regulators and supervisors. let me give you the background to this prudential and countercyclical regulatory mechanism. the origins of spanish dynamic provisioning must be sought in credit developments in the late 1990s. having emerged from the 1993 recession, the worst for 40 years in spain, the economy, and much more intensely so bank lending, began to expand at an increasingly brisk pace. the bank of spain was led to introduce dynamic provisioning, which came into force in mid2000, by a combination of factors. these included most notably : the mix of strong credit growth, with the dangers this entailed for the stability of the financial system ; heightened competition, which acted to exacerbate these risks given that credit institutions applied increasingly lower risk premia to maintain their market share ; the deterioration in the level of loan loss provisions and their extremely high correlation with current default rates ; and, finally, the bank of spain ’ s past supervisory experience. in addition to the practical issues i have mentioned, behind dynamic provisioning there lied a conviction, resulting from many years of supervisory experience and, more recently, also from empirical evidence, that credit risk appears in bank balance sheets at the time lending is granted. risk is an ex ante concept,