There is no rule book that’s good for all seasons, let alone all time. So the new system hardwired in the duty to look up and out and to adapt. The financial crisis had laid bare a failure to do that across advanced economies. Regulation hadn’t kept pace with the risks the system faced, from over-inflated housing and financial markets in the United States to a commercial real estate boom in the UK. Nor had it kept pace with the way the system worked; with securitisation, SIVs and CDS. The result is worth etching in our collective memory. A near collapse of the financial system and a sideswiping of the global economy of epic scale. In the UK alone, a million more people unemployed. And lost income over time equivalent to a bill of £ for every person in Britain. 3  1  The Bank of England’s Financial Policy Committee identifies, monitors and takes action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The FPC is not authorised to take action that is “likely to have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the UK economy in the medium or long term”. 2 The FPC has specific powers of Direction over the Prudential Regulation Authority and Financial Conduct Authority and the ability to make Recommendations (including on a ‘comply or explain’ basis) to both authorities.
And when risk taking increases, it must not be at the expense of the resilience of lenders to any future downturn in the economy. They must remain capable of serving in the bad times, as well as the good. Our annual stress test provides the basis for checking that but, in this environment, more regular check-ups are needed too. That’s why (as we said in the Record of our March meeting) we intend to “re-consider the adequacy [of capital levels] in June, with a focus on the evolution of domestic risk appetite.” We’ll keep standards up with the risks that are being taken. Alongside that, we must also keep up with the third macro trend: a fundamental re-shaping of the system. 9  In part due to regulatory efforts to level playing fields, banking is becoming more competitive. Smaller banks are taking market share. In the past 12 months, smaller banks – that account less than a fifth of the outstanding stock of household lending – have delivered half the new lending to UK households (see chart 5). Their newfound importance in the supply of credit means that, even though they are individually small, their collective risk taking has increasing relevance to the whole economy. Collectively at least, smaller banks must – like their bigger cousins – have the resilience to withstand economic bad times. That trend to greater competition should continue as Payment Services reforms and Open Banking come into play.