and academics on this link between debt and reduction of consumption in stress. some of this work adds to the evidence we already had. there is now more evidence that higher household debt is associated with bigger consumption cuts in a shock. as set out in section 9c of the bank of england act 1998, as amended by the financial services act 2012 : the responsibility of the committee in relation to the achievement by the bank of the financial stability objective relates primarily to the identification of, monitoring of, and taking of action to remove or reduce, systemic risks with a view to protecting and enhancing the resilience of the uk financial system. those systemic risks include, in particular — ( a ) systemic risks attributable to structural features of financial markets, such as connections between financial institutions, ( b ) systemic risks attributable to the distribution of risk within the financial sector, and ( c ) unsustainable levels of leverage, debt or credit growth. the fpc was subsequently – in 2015 - 16 – given explicit powers of direction over ltv and dti limits. all speeches are available online at www. bankofengland. co. uk / news / speeches for example, micro data studies from the uk, us, denmark and norway have all found statistically significant correlations between higher levels of household debt and the size of consumption cuts in a shock. 13 and macro studies have also found correlation between rapid credit growth and the severity of downturns. 14 but new studies have also sought to deepen the knowledge base. in particular, they have looked at why more highly indebted households cut consumption in response to shocks – the channels through which the observed association is working. for example, there could be debt financed ‘ over - consumption ’ prior to a downturn that is then cut back when expectations adjust to reality or credit becomes unavailable. this channel might work directly through unsecured consumer borrowing or through mortgage financed borrowing to consume. alternatively, there are channels through which higher levels of debt constrain household budgets without appealing to ‘ over - consumption ’ : some indebted households may be unable to consume as much as they would like in a downturn because they do not have a sufficient buffer of liquid savings and find themselves unable to access additional credit when they need it the most. this situation is more likely when falls in house prices reduce the value of the borrower ’ s collateral. the situation is also likely to be exacerbated if the downturn is

new relations with our neighbours. and further afield we face a world of heightened geopolitical and trade tensions. so this is not an easy time. but while doing everything we can to manage the risks we face, we also need to keep an eye to the future and to opportunities. with that in mind i hope that the short sketch i have provided today will trigger a debate about the merits or otherwise of introducing a simpler regime for small uk banks and building societies. if it does, we will progress to a discussion paper in the spring and take it from there. in the meantime, a surprising new acronym has entered the pra lexicon : kiss. this is not a reference to a 70s rock band – we do have some rockers in the pra but they seem mainly to be status quo fans. it ’ s also not a homage to the song by prince or the london radio station. still less is it a breach by the pra of social distancing guidelines. rather, lord mayor, instead of “ keep it simple, stupid ”, in the pra we say : keep it strong and simple! 9 see for example : https : / / www. osfi - bsif. gc. ca / eng / fi - if / in - ai / pages / smsb20 _ cp. aspx # fnb19 10 community banks meeting a 9 % leverage ratio criterion can opt into a different regime. 11 see for example : https : / / www. federalreserve. gov / aboutthefed / boardmeetings / files / tailoring - rule - visual - 20191010. pdf all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice figure 1a : predicting distress by setting regulatory thresholds to help us understand the need for a tailored approach for smaller banks and building societies, we ’ ve been testing how well some of the metrics in our current regime would have performed if we ’ d used them to identify vulnerable banks in 2007. we ’ ve done this by applying to historical data about banks ’ leverage ratios, risk - weighted capital ratios, and net stable funding ratios, a technique used in existing bank research. 12 what we ’ re looking for is combinations of these balance sheet ratios which help us separate banks which got into trouble during the succeeding crisis from those which didn ’ t. good combinations produce high hit rates and low false alarm rates