metric. basel iii policymakers were aware of this risk. this is why basel requires disclosure of average lcrs only. however, in some jurisdictions, including the eu and uk, some banks voluntarily disclose their spot lcrs. fourth, there is uncertainty about the future. in contrast to stress testing exercises, a real liquidity stress scenario does not have a well - defined and understood severity or duration – in reality there is no such a thing as perfect foresight. banks may therefore rationally choose to exercise caution in their use of liquid assets due to uncertainty around future shocks and their duration. in general, while a combination of factors is likely to be relevant to banks ’ liquidity risk appetite, these factors often may not only reflect genuine concerns about liquidity, but also reflect concerns around impacts on the lcr metric itself. and there is a number of reasons why focusing on the lcr – or indeed any individual liquidity metric – in stress is unhelpful. liquidity risk can manifest in a variety of ways, for different reasons – and can be fast - moving and self - fulfilling. so any static liquidity stress scenario has limited value in understanding the forwardlooking risks facing a bank when a real stress hits. this is less true for regulatory capital and real solvency stress, especially in a world where regulators constrain both leverage, through a non - riskbased leverage ratio, and risk - based solvency risk, through risk - weighted capital requirements and perform regular stress tests. the denominator of the lcr – the measure of liquidity risk we use to ensure banks hold sufficient liquid assets – is not straightforward to understand, and is particularly challenging to interpret when stress hits. one reasons for this is because the lcr scenario is one specific set of liquidity parameters, representing a stress motivated in large part by the experience of the global financial crisis. in normal times, this set of parameters ensures that banks hold sufficient liquidity to weather a range of potential severe stresses. [ 33 ] but those same static parameters mean that when a real stress hits – which may look quite different to the stress embodied in the lcr – the lcr can move in counter - intuitive ways, and changes in the lcr are not straightforwardly related to changes in banks ’ liquidity position. [ 34 ] and ultimately, the lcr is not the only liquidity metric. that ’ s why when banks face liquidity stress, the pra considers a much broader range

conditions and clearly have implications for one another. • to illustrate the implications of monetary policy for macroprudential policy, consider the example of hong kong, where the unusually low interest rates since 2009 ( as a result of their peg to the us dollar ) have fuelled sharply rising prices across a range of residential and commercial properties ( he 2014 ). attempts to attenuate the financial stability risks from this broad property price boom with targeted macroprudential measures resulted in a large number of measures being applied, even including ltv restrictions on stand - alone car parking spaces, to which the boom had spread. • if loose monetary policy can lead to a build up of financial stability risks, then the converse must also be true – tighter monetary policy can be used as a means of reducing financial stability risks. most empirical estimates show that a temporary tightening of monetary policy can be expected to reduce real debt levels – and bis central bankers ’ speeches hence the probability of crisis – by discouraging households and firms from increasing leverage in the medium term, even if the transmission ( through reduced aggregate demand and a higher interest burden ) involves a short - run move in the opposite direction ( for example, goodhart and hofman ( 2008 ) ). • this was recognised in the design of the uk monetary policy committee ’ s 2013 guidance that it intended to maintain a highly accommodative stance of monetary policy until economic slack had been substantially reduced. recognising the financial stability risks that could emanate from a commitment to maintain low interest rates, the mpc set a “ knockout ” whereby their guidance would cease to hold if the financial policy committee judged that the stance of monetary policy poses a significant threat to financial stability that could not be contained by the combination of macro and micro prudential policy tools available. • what about the more difficult question of whether monetary policy should be used to lean against the wind. the answer is a more obfuscating “ that depends. ” specifically, it depends on the efficiency and efficacy of the macroprudential tools and institutional framework available, a point eloquently made by my colleague don kohn recently ( kohn 2015 ). • take the extreme case in which there are no macroprudential tools. in such circumstances monetary policy may be the only means of tackling system - wide financial risks, but it would come at the cost of significant effects on the real economy – precisely because monetary policy “ gets in all the cracks. ”