For details, see the FPC Record of meetings held on 28 June and 1 July, available at http://www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2016/record1607.pdf 44 A classic view from Brainard (1967) is that uncertainty over the impact of a policy instrument should make a policymaker less active. Bahaj and Foulis (2016) show that this conclusion may not hold for the complex reality faced by a macroprudential policymaker. Specifically, the large costs of financial crises, the presence of unquantifiable sources of risk, the ability to learn from policy, and private sector uncertainty can all be supportive of bolder, more active policy. 31  17  All speeches are available online at www.bankofengland.co.uk/speeches  17
This is all the more important in the context of the “originate and distribute” model given that the effectiveness of the risk transfer instruments on the basis of which the latter has developed requires sufficient liquidity both on the part of agents and markets. It is, incidentally, worth noting that the Committee of European Banking Supervisors (CEBS) and the Basel Committee are working on a revision of the current regulations regarding liquidity. Moreover, concerning risks incurred by some activities such as asset management, it appears necessary to gain a better insight into the transmission channels of these risks between activities carried out for banks’ own account and for third parties as well as the liquidity requirements generated by the latter. More generally, the methods used to assess and capture some risks such as reputational risk and strategic risk, notably in the context of Pillar 2, need to be developed. I would like to stress the very important role that Pillar 2 must play in improving banks’ management practices i) regarding new risks not covered by Pillar 1 and ii) in areas that supervisors deem, specifically, liable to become new sources of vulnerability. In practice, for some activities, there are still no universally accepted standards for risk management. This does not mean, however, that banks’ risk management  BIS Review 11/2008  5  processes in these activities are always sufficiently stringent, but rather that there is a wide range of instruments available for this purpose, each with its advantages and disadvantages.