And within the banking system, to strengthen even further the core – the globally and domestically systemic banks which provide the key connections in the financial system and with financial markets. We have, as I have noted, further to travel through the economic stresses of the COVID crisis. The extent of the economic damage remains very uncertain. But as far as the initial phase is concerned, the banking system has by and large been able to absorb a very sharp financial market shock and the large prospective losses. In the UK, the desktop stress test carried out by the Financial Policy Committee on the basis of the scenario for the economy in the MPC’s May Monetary policy Report3, indicates the banks could face up to £ of credit losses over the next two years. There is of course great uncertainty about the future evolution of the pandemic, of the health policy measures necessary to contain it and of the consequent economic impact. The stress test scenario is only one possible economic path through the crisis; more adverse paths are possible. But even after the very significant losses indicated by the stress test, considerable resilience remains in the core banking system to deal with more adverse outcomes: the impact of the stress test would exhaust a little less than half of the loss absorbing capital buffers in the system. Liquidity failure, as we learned 10 years ago, can damage the banking system faster than credit impairments.
But as with CCP margin, it is important that we remember the reasons for the regulatory reforms in this area. As I have noted, one of the key differences between this crisis and the financial crisis has been the ability of the core banks to absorb a very severe financial market shock. We should not put that at risk by weakening the regulation of banks. If we want to increase the overall resilience of the system we cannot simply lower resilience in one area in order to strengthen it in another. Rather we need to look at other ways to reduce surges in the demand for liquidity and improve the supply of liquidity under stress. See BIS (2017) ‘Repo market functioning’ https://www.bis.org/publ/cgfs59.htm and BIS (209) ‘September stress in dollar repo markets: passing or structural?’ https://www.bis.org/publ/qtrpdf/r_qt1912v.htm 14  13  All speeches are available online at www.bankofengland.co.uk/news/speeches  13  Conclusion  The issues outlined above are neither an exhaustive nor a definitive list. There are other lessons about the financial system under stress that we will inevitably learn as this crisis progresses. Not all of these will be in the financial market and non-bank sectors. We will, as I have said inevitably learn more about the performance under stress of the banking capital regime and the usability of banks’ capital buffers. But the list, I think illustrates two important points.