. that role might be aided by a revival of a market in trade credit. 15 banks will always be levered because their core monetary service revolves around transaction - account deposits, which are debt liabilities. and, on the other side of the balance sheet, they will always have somewhat risky asset portfolios because being a monetary institution makes them an efficient supplier of short - term finance to households, firms and the rest of the financial system. but they can do all that only if they are healthy and prosperous : only sound banks can make a credible promise to repay or lend money on demand. the fragility in banks ’ balance sheets is why they are regulated. today, i have sketched the outline of a capital accord for the future. an accord that would go beyond reducing the probability of failure, by also addressing the need to cope with distressed banks, ensuring that resolution can be orderly. taking the tax - deductibility of debt interest as a given, the banking authorities can make it beneficial to society as a whole, not just to private interests, by requiring that a minimum level of term bond finance be part of the capital structure. that would provide gone - concern loss - absorbency for new improved resolution regimes to draw on. a still richer accord might include instruments that aid recovery by converting into equity in the face of meaningful but not life - threatening losses. this approach moves away from seeing runnable short - term wholesale debt as a source of discipline on banks, to instead seeing longer - term bonds as providing a mass de manoeuvre for recapitalising distressed banks. not all forms of leverage are the same. but no static regime can ever be enough. if they were, crises would not recur. that is why the new macroprudential authorities, such as the bank of england ’ s fpc, will be able temporarily to adjust capital requirements when circumstances warrant. i have stressed that it is oversimplistic to think of macroprudential interventions to improve capital adequacy as always inevitably leading to higher funding costs and tighter credit conditions. it will depend upon the prevailing circumstances : whether the banks started out with solid balance sheets, what the market knows and thinks. the fpc will need to be transparent in order to build understanding of its actions. i worry about the withering away of a market for bankers ’ acceptances ; claims by one company on another, but guaranteed by one or more banks, and historically eligible for discount at central

driven by a reduction in trading volume, but it is the result of a robust growth of the denominator, debt outstanding. 3. liquidity during times of stress market participants further express concern about the potential for market liquidity to become less resilient during times of stress, when it is needed the most. however, evidence on this front is difficult to gather. some argue that market liquidity is resilient because financial markets appear to have functioned fairly well during recent episodes of high market volatility, such as following the brexit vote or earlier this year, when oil prices were low and stock market volatility was high. others argue that it is not. according to a recent study, the cost of trading distressed corporate bonds appears to be higher now than in the recent past. 5 specifically, the authors find that, before the crisis, the cost of a $ 1 million bond transaction increased about 0. 7 percent following a downgrade, but - - after the volcker rule - - the cost following a downgrade rose 2. 4 percent. see bao, o ’ hara, and zhou ( 2016 ). - 4this analysis, however, is limited to episodes of distressed borrowers rather than a systemwide stress. 4. flash events in addition, recent flash events - - such as the sharp movement in treasury prices on october 15, 2014 ; the rapid rise and decline of the euro - dollar exchange rate on march 18, 2015 ; 6 and the swing in sterling on october 7, 2016 - - have led some to assert that market liquidity has become less resilient. researchers at the federal reserve bank of new york have argued that spikes in volatility and sudden declines in liquidity have become more frequent in both treasury and equity markets. 7 the commodity futures trading commission also points out that flash events are more common now. 8 market participants suggest that the rapid growth in high - frequency trading in equity, foreign exchange, and u. s. treasury markets, along with broader concerns about less resilient liquidity, potentially explains these flash events. nevertheless, a report on the october 15, 2014 event by the staff of the treasury department, federal reserve, and market regulatory agencies found no single factor that caused the sharp swing in prices. 9 a broader review of the evidence 1. trading costs are low even though flash events appear to be more common, it is certainly too soon to declare that a broad reduction in market liquidity has occurred. figure