With a more resilient system, all of the financial stability concerns I have been discussing become more manageable. Authorities could also, in principle, adjust macroprudential tools to dampen financial cycles – tightening them when leverage is building up and risk taking is increasing, and easing those requirements when that cycle turns.
For example, regulators can lower loan-to-value ratios in response to indications of rising household sector vulnerabilities. Another example is the countercyclical capital buffer introduced as part of the Basel III reform of bank capital requirements.