a first distinction is between interventions in the boom and bust phases of a credit cycle. imagine that some information came along to suggest that the banking system, while adequately capitalised currently, will taken as a whole be stretched down the road if credit continues to expand rapidly. assuming for the moment common information to the market and the authorities, in this case a macroprudential intervention to require banks to build up capital in order to underpin their resilience in the period ahead might add only a shade to the cost of finance, as banks lose a small proportion of their tax shield. and if banks choose to de - lever, shedding risk to achieve the temporarily higher capital requirement, that action in itself might slow the boom. now imagine a scenario in which information came along to reveal the system was seriously under capitalised right now. maybe a bubble had gone unnoticed until it burst or some banks or funds unexpectedly fail, revealing inadequacies in the regulatory regime. once the market came to appreciate that capital levels were too thin, funding costs would rise sharply. in those circumstances, an injection of additional capital, if it could be achieved, could help to bring financing costs back down. although reliance on relatively expensive equity would be increased, that is dominated by a large fall in the cost of debt finance as failure becomes a more remote possibility. in this hypothetical scenario, the policymaker has something of a tightrope to walk. for an individual bank, cutting risk exposures by reducing lending might at first blush seem to be a step towards restoring capital adequacy. for the system as a whole, however, it would clearly be counterproductive for all banks to delever in that way. the better path, not only for economy but for individual banks as part of the financial system, would be for banks to strengthen their capital structure so that credit supply was not impaired. a second distinction is between the market and the macroprudential policymaker having the same information and views on what ought to be done ( column 1, figure 1 ) and their having different information and views. most interesting are those cases where the market and the fpc are out of synch. suppose the market spotted first that the system was dangerously under capitalised. banks ’ debt funding costs would rise sharply and would remain elevated until the market saw evidence that either the banks or the authorities were grasping the nettle. a belated but decisive action to raise capital levels would then come as welcome news ( column

more expensive equity financing. but, crucially, the system would be more resilient and any eventual bust should be less severe. these examples serve to illustrate that it is unlikely to be as simple as : a rise in capital requirements entails tighter credit conditions. where there are question marks over the system ’ s capital adequacy, the reverse can sometimes be true. more generally, the first round effects on credit conditions will depend upon whether the policymaker ’ s actions revealed information about the state of the system and its approach to policy, and on whether the market regarded the actions as warranted, insufficient or too much. overall, this underlines the importance of transparency – from banks and from the macroprudential policymaker. conclusions : the implications of reform for the shape of finance cyclical fluctuations in credit conditions and macroprudential interventions to influence them will not play out in an unchanged financial system. in fact, it would be surprising if the bis central bankers ’ speeches market ’ s own response to the crisis and the regulatory reforms did not drive structural changes in the credit system. the shape of some can perhaps be discerned. too - big - to - fail effectively subsidised longer - term bond finance for banks. combined with lax liquidity regulation, this probably left the sector as a whole with larger and longer - maturity asset portfolios than otherwise. a few decades ago we used to talk about government crowding out the private sector from the capital markets. well, the bloated balance sheets of tbtf firms essentially crowded out other long - term investors from parts of the credit markets. unlevered sources of funds struggled to compete with the banks, but instead held lots of bank paper, thinking it risk free. competitors to the banks had to lever up : fragile shadow banks were one result. actions to remove the subsidy from banking will, amongst other things, create conditions in which the relative role of unlevered capital market investors can grow. some of that might come through securitisation, although a mature and resilient market in abs of loans to smes might well require initiatives to produce rich data sets on credit histories. the time may have come to evaluate the utility of the central credit registers that have long existed in some continental european and asian countries. none of that, however, can alter banks ’ core comparative advantage as monetary institutions : the provision of liquidity through overdrafts, lines of credit and other working capital facilities