alex brazier : a macroprudential approach to bank capital – serving the real economy in good times and bad speech by mr alex brazier, executive director for financial stability strategy and risk of the bank of england, at the 27th annual institute of international bankers conference, washington dc, 7 march 2016. * * * i am grateful to rob edwards, jas ellis and calum mitchell for their assistance in preparing these remarks. your industry has known better starts to a year. bank stocks down, volatility up, earnings disappointing. all ghosts of crises past. but one ghost has not returned to haunt us. questions about returns haven ’ t translated as they ’ ve done before into questions about resilience. investors may have real questions about whether some banks can generate adequate return on equity in a difficult global economic and trading environment. they may also be more alert to the risks in and appropriate returns to contingent capital instruments. but when uk bank price - to - book ratios were this low in 2009, senior unsecured debt spreads were over 350bps. at the height of the euro crisis in 2011, they were 300bps. today, they are just 73bps ( chart 1 ). underlying that is the transformation of bank capital. in the uk, major banks now have core tier 1 equity ratios averaging nearly 13 %. before the financial crisis they had – on basel iii definitions – just 4. 5 % ( chart 2 ). those new levels of resilience are seen in the results of stress tests. last year, the bank of england subjected uk banks to a sharp slowdown in china, a fall in oil prices and intense market volatility, coupled with stressed estimates of redress costs for past misconduct. across the system, banks in the test incurred losses of £37bn. that ’ s over twice the losses of the system in the financial crisis. back then, losses on that scale would have wiped out almost two thirds of the capital of the entire british banking system. with so much more capital today, the stress test showed those losses could be absorbed, even while the system continued to grow credit to the real economy. far from sideswiping the real economy under stress, the test showed the banking system could continue to support it. 1 and yet, there is still, eight long years after the crisis, a lively debate in newspapers, blogs and academia, about whether the capital strength of the banking system should be built up further. available at http

cost with net present value of 0. 6 % of gdp. 7 this all raises an important macroprudential question : how to best protect the real economy without the unnecessary risk of holding it back? our answer in the uk has three parts. first, to protect the economy from the consequences of bank failure. and to do so at minimal economic cost. effective bank resolution unlocks this. with minimum disruption to existing funding structures, it opens the door to preserving the functions of failed banks without recourse to the taxpayer. serious progress has been made in building resolution regimes. an eu - wide legal framework is now in place. cross - border arrangements have been stepped up. agreements have been reached on temporary stays to closing out contracts in resolution. and the g20 agreement on total loss absorbing capacity ( tlac ) standards for global systemic banks has a game - changing principle at its heart. systemic banks must have the capacity to replenish capital, up to minimum regulatory standards, even if all capital – of all tiers – has been completely burned through. 8 it ’ s a game changer because it hardwires the recapitalisation of failing banks. bailedin debt holders become, very quickly, the proud new owners of the bank. case study evidence is striking. rapid recapitalisation of failed banks speeds economic recovery. it cuts the long - term costs of systemic bank failure in half. but resolution through bail - in is more than a fire extinguisher. it ’ s a non - flammable coating of the banking system too. it helps to prevent bank failures in the first place. unsurprisingly, the evidence is that when debt holders face the consequences of failure, banks take fewer risks. international estimates suggest that the removal of the heads - i - win - tails - you - lose ‘ too big to fail ’ subsidy cuts the risk of failure by a third. as you know, the removal of that subsidy isn ’ t a pipedream. rating agencies are already removing “ state support ” uplifts from bank debt ratings. 9 and yes, it will raise this is very similar to estimates of miles et al ( 2012 ), who find the effect of increasing capital from 3 % of total assets to 6 % of total assets to be around 6 % of gdp. the bank of england, as uk resolution authority, is now consulting on proposals to implement that principle in the uk for all systemic banks, as it must