when expectations meet the future speech given by sir jon cunliffe, deputy governor for financial stability, member of the monetary policy committee, member of the financial policy committee and member of the prudential regulation committee london school of economics wednesday 6 march 2019 i am grateful to hugh burns, andrew gimber and katie low for their help in preparing these remarks. all speeches are available online at www. bankofengland. co. uk / speeches the subject of this symposium is “ the next great crisis ” by which i think we mean financial crisis. one of the defining characteristics of humans is our ability to imagine the future, as i shall discuss later. but though we can imagine the future, we cannot know it. and i am a cautious central banker. so i will not today give you my prediction for the origin, shape and extent of the next great crisis. i am however prepared to make one prediction with confidence. whatever the trigger and the financial services and instruments most affected, the next crisis will have, somewhere at its centre, losses from an overextension of credit and an adjustment in asset prices. and, for me, as deputy governor at the bank of england responsible for financial stability, an equally if not more important question is not what will the next great financial crisis look like but whether the next and subsequent financial crises will actually be ‘ great ’. will the correction of asset prices and the losses on credit be amplified by the financial system and cause the economic and social loss we saw 10 years ago? or, losses notwithstanding, will the system absorb them without material dislocation to the economy? i can make the prediction that the next ‘ crisis ’ will have somewhere at its centre the overextension of credit and asset price adjustment because it is not a particularly bold one. since its invention in the temple organisation of bronze age mesopotamia, interest bearing debt – or credit if you want to see it from the other side of the coin – has had the property of being able to grow beyond the ability, or sometimes the willingness, of the economy to repay it. debt contracts are essentially claims on the future and the future, when it arrives, does not always honour them. the origin of debt and credit are fascinating but unclear. it may have been an evolution of the reciprocal gift giving social obligations of early tribal societies. the etymological evidence suggests rather an evolution from the system of fines and compensation for injuries prevalent in such societies. 1 it has also been suggested that the foundation

of forbearance which might delay a necessary resolution. that is why the bank believes that the resolution authority, wherever it is located, should have a powerful voice in decisions on the use of the trigger. moreover, any resolution authority will have a natural interest in the timing of a decision to place a bank under its control. third, a clear framework for accountability should be established to give confidence that decisions relating to the resolution regime are exercised in line with the objectives for the regime set out in legislation. turning to deposit insurance, i understand the concerns that many of you have voiced about the reforms discussed in the tripartite consultation document. i know that you accept that to avoid bank runs there will need to be 100 % insurance of deposits – up to a limit. that limit should not be too high. and in order to limit risk - taking by banks there is also a strong case for relating the payments made by different banks to finance the insurance scheme to the risks that they will fail. and in that context, some element of pre - funding is natural and is used in many countries, including those with banking systems similar to our own, such as canada and sweden. a degree of pre - funding is one of those ideas that is bound to be unpopular before the fund is called upon, but seems decidedly wise after the event as it lessens the burden on the banking system in a time of stress. on the regulation of bank liquidity, the fsa has already issued a discussion paper, and i support strongly the case for reform of liquidity regulation made this morning by sir callum mccarthy. i very much hope that an international initiative to include liquidity in the basel capital regime, in which the bank is playing a leading role, will come to fruition. for our own part we, along with other central banks, have been reviewing the way in which our market operations can alleviate stress in the banking system. the primary objective of our money market operations is to ensure that the interest rate on overnight lending in the market is close to the bank rate set by the monetary policy committee. that constrains the net amount of central bank money we lend to the system. but we are also concerned with illiquidity in particular markets when it threatens the stability of the system as a whole. it is this concern that motivates the choice of assets we lend against in both normal and stressed conditions. a loss of liquidity in markets on which the banking system as a whole relies can mag