jon cunliffe : ending too big to fail – progress to date and remaining issues speech by sir jon cunliffe, deputy governor for financial stability of the bank of england, at the barclays european bank capital summit, london, 13 may 2014. * * * we are now a little short of five years on from the deepest point of the recession that followed the global financial crisis. advanced economies seem set on the path to recovery – though as every central banker will feel compelled to tell you, very real risks remain. it has been a long, hard slog to get to where we are and the damage – to jobs, to wealth, and to the productive capacity of the economy going forward – has been great. economic theory tells us that recessions which follow financial busts are deep and long lasting. recent history bears that out. there is a determination – in politics, in the regulatory community of which i am part and i think in the financial services industry itself – to learn the lessons of the recent past. there are different views – some more extreme than others – on all sides about what is necessary. on how far - reaching change should be? and how far reaching change can be if the financial sector is to continue to play its vital role in the economy of channelling credit efficiency between savers and borrowers? but change there has to be – if both the regulators and regulated are to re - establish society ’ s confidence that we can have a dynamic and global financial sector, one that serves the real economy, without generating such painful financial booms and busts. and the process of designing, agreeing and implementing that change is long and complex. i make no apology for this. the financial crisis was not a simple and short - lived episode. nor can the response be simple or quick. we are now, however, well into that programme of regulatory reform. i want to talk today about some of the key elements of that programme. elements that are now moving from the stage of discussion and design to the stages of agreement and implementation. and i want to talk particularly about the various initiatives that together bear on what is perhaps the biggest challenge ; ensuring that no bank is too big to be allowed to fail. it is pretty obvious now that we went into the crisis with a high risk, highly interconnected banking system that had dangerously thin levels of capital and liquidity. not only were too many banks too vulnerable to serious stress ; the authorities also lacked the tools and the

tightly than risk - weighted measures for a number of banks that met their risk weighted capital ratios but that subsequently failed. the debate about the relative merits of risk weighted capital controls versus un - risk - weighted controls like the leverage ratio has in my view become too hung up on the question of backstops and frontstops – on which constraint should bite first. this is an unhelpful way to look at the issue. risk - weighted and non - risk - weighted measures protect against different risks. the leverage measure is there to manage model risk, which can be very significant. which of the two ratios binds first depends on the kind of risks that banks are running. the leverage ratio automatically places tighter limits on expansions in the balance sheet through supposedly low - risk assets. the international community has made progress on the leverage ratio. the definition guiding how it should be calculated was agreed at the start of this year. this will provide the basis for banks to disclose the ratio over the next 3 years in the light of which the international community will decide in 2017 on the calculation of a minimum standard. a number of authorities, including the us, the netherlands, and the swiss, have already introduced or are considering a leverage ratio in advance of the international standard. in the uk, the prudential regulation authority has already asked the eight major uk banks and building societies to take steps to achieve a leverage ratio above 3 %. the financial policy committee has been asked by the chancellor to review whether a leverage ratio framework should be introduced in advance of the international framework. this could include a power for the fpc to vary the ratio to counter macro - prudential risks. the fpc will consult on the review and expects to publish its conclusions towards the end of the year. there is also important work underway to ensure the risk - weighted framework is robust. reviews are underway to build a credible standardised approach to calculating risk - weights for banks ’ trading activities and their loan books ; this too should help reduce the system ’ s exposure to model risk. the other key element of the capital and liquidity regime to be agreed is the net stable funding ratio. this standard addresses banks longer - term liquidity risks. proposals are currently out for consultation and the basel committee aims to agree the standard in september this year. concerns have been raised by some in the industry that taken together, the main elements of the new capital and liquidity regime can interact to have potentially serious and unwelcome unintended consequences particularly