Macroprudential for the whole economy  To put that action in context, let me start with a very high level sketch of what in my view we mean by financial stability. Financial stability in essence is ensuring that the financial system and the real economy are able to absorb the ups and downs of the financial cycle. And, by extension, that the financial cycle does not amplify the troughs of the business or economic cycle or more generally disrupt the economy. We care about the ups, the peaks of the financial cycle because higher peaks are likely to result in higher falls and so, require higher resilience. By financial cycle I mean essentially the build-up and contraction of credit or leverage in the economy and in the financial system. The rise and fall of asset prices – both financial and physical assets – does of course matter. But it matters much more when assets are financed by credit.4 The term ‘financial cycle’ implies some smooth predictable sine wave. Life, I am afraid, is not like that. Financial cycles do not follow nice patterns: they are only ‘cycles’ in the sense that we can observe periods of credit growth followed by periods of contraction. The growth of credit in an economy tends to build up and accelerate over time and then contract as optimism about the future income streams and asset values waxes and wanes. And there are mechanisms, such as collateral values, endogenous to the creation of credit that reinforce both the upswing and the downswing.
Jordà, Òscar, Moritz Schularick and Alan M. Taylor (2016), The great mortgaging: housing finance, crises and business cycles, Economic Policy, 31 (85), pp. 107-152. Kovacs, Agnes, May Rostom and Philip Bunn (2018), Consumption Response to Aggregate Shocks and the Role of Leverage, Discussion Papers 1820, Centre for Macroeconomics (CFM). Levina, Iren, Robert Sturrock, Alexandra Varadi and Gavin Wallis (2019), Modelling the distribution of mortgage debt, Staff Working Paper No. 808, Bank of England. Nakajima, Jouchi (2018), The role of household debt heterogeneity on consumption: Evidence from Japanese household data, BIS Working Paper No 14  All speeches are available online at www.bankofengland.co.uk/news/speeches  14