Bluntly I think we wouldn’t be doing our job if we didn’t do this – but at the same time the competition objective requires us to ride both horses at once. This is doable but it is tricky. It also raises an interesting question about the relative costs of supervising smaller firms versus higher FSCS levies to cover failures, which would merit further study. Fourth, how is technology going to affect all this? This is obviously a huge topic in its own right, and others here will touch on it so I will make only two brief comments. One, in my view the jury is still out on whether Open Banking and/or PSD2 are the gateway to a bigger change. Two, it is notable that some digital banks are making material inroads into the current account market – is this the leading edge of a bigger change, or not? Fifth, might Brexit create opportunities to move further on proportionality for smaller firms? I’ve already talked about the way in which we make the regime tougher for larger firms. This is entirely appropriate, but is not the same as saying we should have a weak prudential regime for smaller firms – indeed, I think that is the last thing we need both from a safety and soundness and a competition perspective. However, there may be a reasonable case that a simpler (simpler, not weaker) regime for small firms would advance both our safety and soundness and competition objectives.
Our new approach is designed to counter the risk that policy is too accommodating in upswings and too harsh in downturns. Two important principles stand out for me: first, that we must carry out financial regulation with an eye on conditions in the real economy, which means promoting stable and sustainable credit creation and growth; and second, we should always be prepared to look to the risks ahead, and exercise sensible judgment. The financial crisis has taught us in the most painful way of the dangers of waiting too long to take action and then being unable to prevent the worst consequences of delay. The FPC has recommended that British banks make sure their capital level is high enough to withstand future threats. Some banks will need to increase their equity capital for a given level of risk in their balance sheets. Concerns have been expressed that this change will harm lending to the UK economy. I do not agree with these concerns. Equity capital is not money that has to be stashed away for a rainy day and thus put to no good use. It is the shareholders’ stake in the company. In nonfinancial companies, shareholder capital or equity is used to finance the acquisition of assets. The same is true for banks. Equity finances the provision of loans to households and companies, and those loans are the banks’ assets. In that sense, capital supports lending by banks and does not substitute for it.