Market-based debt has accounted for all of the growth in the stock of debt to UK businesses since end-2007. Overall, that shift is positive for the resilience and stability of the system. Other things equal, £ of loss incurred in the non-bank financial system is almost certainly less disruptive to the wider economy than £ of loss incurred in the banking system. But without the right resilience, could the non-bank system also result in some damage to the economy in an economic earthquake? How should financial building standards adapt to the changing nature of the buildings in our economic city? 15  All speeches are available online at www.bankofengland.co.uk/news/speeches  15  Keeping up with a changing financial system Given the non-bank system’s growth and new-found importance, we face a challenge. There is little evidence of past performance to guide any assessment of the non-bank system. And it would not be sensible to wait until we have some. Our solution is to replace wait with simulate. So this is yet another area where we are developing cutting-edge work, this time to simulate how an economic earthquake could play out in the non-bank system.10 It is our version of what earthquake engineers call a ‘shake table’: a device for testing how models of new structures respond to tremors. The simulator considers generic markets – for equity, corporate credit, government bonds and some key types of funding and derivatives – and representative insurance, hedge fund and mutual fund sectors.
Where we draw the line within that for being in scope of this initial first step of the strong and simple framework will impact the extent of simplification we can achieve while maintaining strong standards. There is also the risk that simplifying requirements for smaller firms could increase barriers to growth, if the step up to the next level of our framework is too big. That being said, we could in the long run move to a graduated approach that covers all nonsystemic firms. Under such a regime the complexity of the framework would grow 2/5  BIS central bankers' speeches  commensurately with the size and complexity of a firm’s activities, minimising potentially steep barriers to growth. This is in fact the long-term vision we have outlined in our paper. But doing this will take time and, rather than delaying the roll-out of a simpler framework for everyone, we thought a better approach would be to do this step-by-step. One possible first step is to start with the smallest firms that would benefit the most from a radically simpler regime – but, as with all the trade-offs in our paper, this is something we would welcome views on. We also need to consider the position of foreign banks that operate in the UK. Internationally active firms will continue to be in scope of international standards; likewise, it may be appropriate for subsidiaries of international groups to stick with the international standards. But we have an open mind on this.