the different phases of a bank ’ s life and death. regulatory intervention is plainly required to set a minimum level of equity to provide sufficient going - concern loss absorbency. that is the core purpose of the existing basel 3 accord. but it is not enough. we also need to regulate for a minimum level of term bonded debt to provide gone - concern loss absorbency. 11 in effect, in return for the private cost saving due to the tax regime, the authorities would be mandating term bond issuance of a minimum quantity from prescribed parts of banking groups in order to make resolution feasible. contrary to some of the academic literature, this gives value not to short - term debt on the basis that it can run and so acts as a disciplining mechanism, but rather to longer - term bonds. they can absorb losses, helping to recapitalise the firm in resolution ; and can thus be a source of market discipline through price and rationing. 12 that might be enough. i would expect, for example, that package to incentivise banks and their investors to issue and buy securities with conversion features that helped them through recovery or resurrection without the intervention of, respectively, the regulators or the statutory resolution authority. alternatively, a richer accord might go further, mandating so - called high - trigger cocos, so as to encode recovery measures into a bank ’ s capital structure. and it might even include lowtrigger instruments to aid resurrection when a bank had seriously impaired equity but was not on the brink of bankruptcy. taken together, that would be a robust accord for normal times ( equity ) ; for recovery ( high - trigger cocos ) ; for resurrection ( low - trigger cocos, or ponv instruments ) ; and for resolution ( term bonded - debt issued from the top of the group ). 13 macroprudential regimes and the cost of finance are reforms to resolution regimes and capital requirements – even a more complete capital accord along the lines i have sketched for almost the entire capital structure – sufficient to preserve systemic stability? the clear answer of the authorities to that is they are not sufficient, which is revealed by our creation of macroprudential regimes. that is for two reasons. first, any realistic regulatory capital regime, however rich, will sooner or later be found wanting due to regulatory arbitrage or an economic environment that is more risky than anything contemplated when it was calibrated. the authorities need to be able to respond to i have argued

##termediation is significant, banks will be taking back on to their balance sheets conduit and investment vehicle paper or just holding onto loans for longer than usual before they can be sold onto the capital markets. perhaps nothing illustrates this as cleanly as the advent of credit derivatives. derivatives of any kind unbundle funding ( and so liquidity risk ) from the underlying risk to which an agent is seeking exposure via a particular contract. so a credit derivative unbundles credit risk from funding. this further complicates interpretation of the bank lending data ( m4l ). imagine that, due to their customer networks and screening capability, banks originate all credit, but that they use credit - default swaps to shed a great portion of the credit risk via cds to non - bank financial institutions. in the limit, this would be a world in which m4l correctly measured ( bank ) lending and m4 was one useful measure of “ liquidity ”. but it would also be a world in which shocks to credit conditions from capital and risk appetite worked largely through non - bank lenders, and in which shocks to liquidity worked largely through depositor confidence in the banking system. in the real world, this story underlines the need to look at total credit, and to analyse the monetary data with finesse. see bank of england inflation report, november 2007, section 1 on “ money and asset prices ”, pages 16 - 17. it cannot be ruled out that, for a while, the m4l growth rate may deceive as to the underlying pace of credit expansion in the economy. that is important because, in a nutshell, the turmoil in financial markets is not just a “ city ” event. how potent it will be macroeconomically will depend on how long current conditions persist, and the feedback loop between the financial economy and the real economy. as to its persistence, necessary conditions for an alleviation of the current strains in credit markets are probably at least twofold. first, that the us housing and household debt markets stabilise. second, that banks and other financial intermediaries recognise impairments to asset values, so that uncertainties about counterparty credit risks begin to reduce. on the financial - real economy interaction, we must try to avoid a vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other. a variety of policy responses are