mortgages ( erms ) we have consulted on measures to ensure that investments1 in that asset class, which is growing by more than 10 % a year, are appropriately and consistently reflected in the regulatory balance sheet. we want to do this both for prudential reasons and to facilitate competition by establishing a level playing field. our proposition is a simple one : house price growth above the risk - free rate is a risk to which erm providers are exposed ; it should not therefore be assumed and banked up - front as capital in the form of the matching adjustment, even if a reasonable person could expect house prices to increase in that way – instead, that benefit should be earned if and when the house price growth actually materialises. we have received many strong views in response to this suggestion, and are considering them now before reaching a final view. good cop i will turn now to the other part of our work – areas where, as i see it, there is generally no inherent conflict and we and firms are engaged in a shared endeavour to deal with the challenges we face. you may be relieved to hear that, in my determination to be the mansion house good cop this year, i will only touch on two examples of this – though each of them is a huge topic. operational resilience first, what we call ‘ operational resilience ’ – the ability of firms to keep going operationally as well as financially. compared to our framework for things like capital, liquidity and accountability, the regulatory framework for operational resilience is thoroughly under - developed not only here in the uk but also internationally. this matters more than it used to for a number of reasons, but let me pick out two. first, the emergence of cyber - attacks is a clear and present danger to the financial system which our forebears simply did not have to worry about. and second, as more and more of us access banks and insurance companies digitally, with a major programme of bank branch closures in full swing, and in the age of social media where problems become very visible very quickly, operational failures hurt more than they used to. for the same reasons the treasury select committee is rightly taking a strong interest in this topic. £20bn as at year - end 2017 all speeches are available online at www. bankofengland. co. uk / speeches we therefore published during the summer – jointly between the pra, fca and bank as supervisor of market infrastructure – a discussion paper proposing

##ification may purge idiosyncratic risk, it simultaneously reduces diversity and thereby increases systemic risk. 15 it, too, increases the risk of adversity being socialised and prosperity privatised. • high default assets : a fourth strategy for exploiting the asymmetry of equity payoffs is to originate assets which themselves have asymmetric returns. high risk loans are one example. these assets yield a high fixed payoff in good states of the world, but in bad states default generating large losses. because losses are bunched in the tail, the result is that more of the gain is privatised and more of the loss socialised ( figure 3 ). this was the strategy pursued by us banks in the run - up to crisis. unlike banks in europe, us banks were effectively constrained from expanding their balance sheet by a regulatory leverage ratio. so instead they did the next worst thing : they sought higher return on equity by increasing the riskiness of their asset pool. this explains their venture into sub - prime and leveraged lending and various kinds of securitised exotica. chart 9 looks at the leverage and risk positions of european versus us banks. european banks lie in the north west, as they exploited the absence of a leverage constraint to expand their balance sheets in search of higher return on equity. us banks, by contrast, located themselves in the south - east with lower leverage but higher risk per unit of assets. for us banks, this was a best response strategy for boosting shareholder payoffs. when risk on these high - default assets materialised, however, the result was the same as for european banks – deep losses, often cushioned by the state. • out - of - the - money options : the payoffs to high - risk lending can be replicated using an alternative strategy of writing deep out - of - the - money options. this can be achieved, for example, by selling protection in the cds market. the writer of that protection receives an insurance premium and thus a steady source of income in keynes ( 1931 ). haldane ( 2009 ), beale et al ( 2009 ). good states of the world. because of that, this strategy appears to generate “ alpha ” – excess returns – during the good times. in fact, this strategy is a wolf wrapped in sheep ’ s clothing ; it is beta dressed up as alpha. in the event of a bad state of the world – default by the reference entity in a cds context –