as a safeguard against errors in ex ante estimates of risk and prevents excessive balance sheet stretch. in the uk, the financial policy committee ( fpc ) has recently announced its plans for leverage ratio requirements and buffers. 1 and third stress testing, to assess capital against the impact of macro - economic scenarios of current concern to policymakers, in the uk modelled partly using firms ’ internal models and http : / / www. bankofengland. co. uk / financialstability / documents / fpc / fs _ lrr. pdf. bis central bankers ’ speeches partly our models. the results of our first concurrent stress tests of major uk banks and building societies will be announced next month. the new bank capital framework will cause banks to hold significantly more capital than the pre - crisis regime. major uk bank capital requirements and buffers have increased around seven - fold once you take account of tougher definitions of capital, regulatory adjustments to asset valuations and higher risk weights as well as the more obvious increases in headline ratio requirements and buffers. but, to use the language of micro - economics, this significant change in regulatory capital requirements – the “ relative prices ” of different risks – will lead to substitution as well as income effects. over time, banks will adjust their portfolios to changed capital requirements. the overall extent to which banks are better capitalised and the financial system is more stable will depend on the scale and nature of these adjustments. any substitution effects are likely to be stronger if regulation is introduced inconsistently across countries. it is important that we continue to seek consistency in implementing internationally - agreed standards. one adjustment may be a shift in activity from banks to non - banks. that could be beneficial for financial stability : for example, where long - term market - based finance provides an alternative to bank credit. but we must be alert to the development of new forms of shadow banking, meaning substantial maturity transformation and leverage outside the banking system. the balance of activities may also shift between banks. the post - crisis reforms include additional capital buffers for globally - systemically important banks ( g - sibs ), and, as the governor has said, the fsb is on track to present a proposal for an international standard on total loss - absorbing capacity for these banks, to the brisbane g20 summit this month. 2 these changes are intended to move g - sibs further away from distress and to make orderly resolution possible if, nonetheless, they do fail. but it is possible that

. " stability is a necessary condition for sustainable growth " has become the universal central - banking credo - though that doesn't necessarily make it any easier to achieve! this emphasis on macro - economic stability - and sustainability - has served to focus attention increasingly on the supply - side of our economies - on structural reform and supply - side flexibility - as the key to raising the underlying rate of growth which our economies can maintain. and that is the second general trend i'd like to touch upon. it has meant increasing reliance upon free markets - again both nationally and internationally - to allocate productive resources to where they can most effectively contribute to meeting demand. the collapse of communism is a dramatic example, but the promotion of free trade through the wto and of the free movement of capital through the imf, or the spread of privatisation and deregulation all around the world, not least in financial markets, can all be seen as aspects of essentially the same thing. this emphasis on free markets cannot mean " anything goes ". public policy concerns, of course, remain ; and we need to have rules to ensure that competition is fair as well as free. but it does mean less centralised, bureaucratic, intervention telling people what they may or may not do, leaving them much greater freedom to do what they choose provided they meet the necessary nationally or internationally agreed standards. the resulting intensification of competition can, of course, be uncomfortable for existing producers - and can lead to protectionist pressures at the micro - economic or even the national level - so we still have a long way to go. but it is increasingly accepted as the best means we have raising the sustainable rate of growth - and employment - and living standards - at the macro - economic, and international, level. these trends together have resulted in substantial economic progress in most of the developed economies. but - and this is the third theme i would draw attention to this morning - there was growing recognition of the fact that not all countries were equally well - placed to share in the potential benefits of free markets within a stable macro - economic framework, and of the need - as a matter of self - interest and not just social responsibility - to help draw other countries in to the global economy. emerging markets and transition economies have increasingly gained access to international capital markets. and there is an increasing emphasis on the need to help the poorest countries that are seeking to help themselves to participate. this last concern will be on the agenda