They come close to the two ideal forms that I mentioned earlier: in some areas there will be centralisation and discretion; in others decentralisation and no discretion. From November this year banking supervision will be centralised in the Single Supervisory Mechanism (SSM). Bank resolution will also be centralised in the Single Resolution Mechanism (SRM). The latter is particularly important as the legal framework it will  BIS central bankers’ speeches  5  implement – the Bank Recovery and Resolution Directive (BRRD) – contains quite some discretionary exemptions, in particular from the new bail-in provisions. For deposit guarantee, there is no centralisation yet. But under the recently adopted directive national schemes will have to meet the same minimum standards for levels and funding, meaning that there is also little discretion. Implementation, therefore, will be key. Fiscal union Banking Union will certainly help reduce the impact of sovereign risk on the banking system. But still, there is little that can be done if sovereigns pursue manifestly unsound fiscal policies. Domestic banks remain heavily exposed to their sovereigns. And any regulatory initiatives to address this issue – e.g. large exposure limits or doing away with the risk-free treatment of sovereign debt – can only be introduced very gradually in order to avoid market turmoil, and most likely only in the context of other governance reforms. Thus, to be consistent, a single banking system and a single currency require a fiscal framework that guarantees budgetary solidity.
And it is not comprehensive: it won’t protect pedestrians, and pile-ups will still block important highways to traffic. In macroprudential policy as in road safety: an ounce of prevention can be worth a pound of cure. 34  Crash resilience must be accompanied with standards of driving behaviour that prevent accidents in the first place – with speed limits and a Highway Code. We have applied that principle in the mortgage market. Alongside capitalising banks to withstand a deep downturn in the housing market, we have put guards in place against looser lending standards:  A limit on mortgage lending at high loan-to-income ratios;  And a requirement to test that borrowers can still afford their loan repayments if interest rates rise. 35  These measures guard against lending standards that make the economy more risky; that make what could happen even worse. Debt overhangs – induced by looser lending standards – drag the economy down when corrected. And before they are, high levels of debt make consumer spending more susceptible to the unexpected. 36  So they guard against lenders being exposed to both the direct risk of riskier individual loans, and the indirect risk of a more fragile economy. This multiplicity of effects means there is uncertainty about precisely how much bank capital would be needed to truly ensure bank resilience as underwriting standards loosen. 37  A diversified policy strategy –  speed limits and air bags – is more robust to that uncertainty.