Speaking as chair of the Financial Stability Board’s working group on the resolution of crossborder firms, I can update you on the work already in train. Basically for the top roughly 25 banks and dealers, the authorities will work with them over the next 6-9 months to produce recovery and resolution plans. The effort will build on the existing supervisory colleges, but typically at a more senior level, and involving resolution authorities and central banks as well as line supervisors. After official level exchanges, there will be engagement with those firms, also at a senior level (say group CFO). The desired outputs will cover two things. First, recovery plans for “de-risking” a group where it can and should be maintained as a going concern. Second, a resolution plan when a firm needs to be wound down and put to rest, but with essential economic functions maintained somehow. The FSA has explained their contribution to the exercise. No one should think that this will be easy; or that anyone in the official sector is naïve about that. It will, in fact, be formidably difficult. The process is, for that very reason, designed to flush out the issues, so that they can be properly debated and reviewed.
But they also had no conviction about when, or indeed whether for sure, the music had to stop, and so feared individually that stepping away from the dance “too early” would crystallise business risk, as the dance would simply go on without them and their franchise would be undermined as customers migrated to their competitors. These seem pretty close to the circumstances that Federal Reserve Chairman William McChesney Martin had in mind, over 50 years ago, when he talked about Taking Away the Punchbowl just as the party gets going. An intervention of some kind is needed from someone outside the dance. Some commentators argue that the intervention should come via monetary policy. That as well as steering the path of nominal demand in order to maintain low medium-term inflation expectations, monetary policy should seek to tame the credit cycle. As MPC colleagues have already argued publicly, 6 we are very doubtful about that. It is likely that much higher rates would have been needed in the UK to choke off the credit boom, with the likely effect of pushing the economy into quite a prolonged recession, with a persistent and substantial undershoot of our inflation target. The business cycle and the credit cycle were simply not closely aligned. That is not to say that monetary policy should not take into account risks to the inflation outlook that accumulate slowly and with great uncertainty about when and how they will crystallise. But it makes a compelling case that monetary policy is not sufficient on its own.