(Many economists remember the famous  9  All speeches are available online at www.bankofengland.co.uk/speeches  9  result of Brainard (1967) that uncertainty implies caution; few recall the more interesting result that 38  uncertainty motivates diversity – the use of all available policy tools in concert. ) A diversified policy is also more comprehensive. It guards against regulatory arbitrage; of lending moving to foreign banks or non-bank parts of the financial system. And by reducing the risk of debt overhangs and high levels of debt, it makes the economy more stable too. Why use the cure that creates just resilient banks when you can use the prevention that gives you a stronger economy too? 39  Consideration must now be given to how far to take these road safety standards. Is it optimal to address risks from the commercial real estate market and consumer credit solely with the cure of bank capital? Or might a preventative approach be more robust and comprehensive? Similar consideration must also to be given to the feedback loops in the financial system. Where should they be addressed directly? That is a topic for another day, but robustness and completeness will call for some to be addressed directly. Macroprudential policy – at home and internationally – is moving into this space. 40  So this is my third – and final – call to arms for academic research: where – in building resilience – is an ounce of macroprudential prevention worth a pound of cure?
The focus of strengthening the system since the crisis has been on building the resilience of the core banking system. The results have been transformative. A system that could absorb losses of only 4% of (risk weighted) assets before the crisis now has equity of 13.5% and is on track to have overall loss absorbing capacity of around 28%. 32  Our stress tests show that it could absorb a synchronised recession as deep as the financial  crisis. And if signals emerge that what could happen to the economy is getting worse, or the feedback loops in the system that would be set in motion are strengthening, we will go further. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  But bank capital is not always the best tool to use to strengthen the system and is almost certainly not best used in isolation. It is a classic ‘cure’ – a largely fatalistic approach, taking what could happen in the economy and the feedback loops in the financial system as given, and ensuring they can be withstood. 33  Sometimes we must be fatalistic. We don’t have the means to prevent foreign credit booms, for example. But building resilience into the financial system solely using bank capital is equivalent to addressing road safety only with tougher car safety standards – more airbags – while ignoring standards of driving behaviour. Such an approach is not robust: no airbags will deal with all types of crash.