Whether banks continue to draw down on their capital buffers to maintain lending – or whether they react defensively and deleverage to conserve capital, particularly as they approach Maximum Distributable Amount thresholds for restrictions on AT1 coupons, will be a key area for regulators to watch in the coming months. My initial assessment, however, on what we have seen is that the UK banking system has demonstrated so far that it is likely to be resilient a pretty long way into the tail of adverse shocks. The little thought experiment above illustrates that while building resilience in the financial system in good times might seem expensive, it is the better economic bet over the long run. The other major post crisis reform that we have seen operating under severe stress conditions in recent months is the changes made to derivative markets and particularly the requirement that derivatives trades be prudently ‘margined’ or collateralised against counterparty failure and – where sufficiently standardised – centrally cleared.7  10 years ago, as financial asset prices fell, a complex and under-collateralised web of ‘over the counter’ (OTC) derivative trades between financial market participants was revealed. The resulting exposures and demands for collateral greatly amplified the stress and uncertainty in the financial system.
First, as we learned 10 years ago, we need to look at how the system as a whole has performed under stress and whether and how it might be strengthened. Focussing on the resilience of one or another element without understanding its broader effect will give us a false picture. Second, such a comprehensive assessment, cannot be done by one jurisdiction or one international standard setter. And in this respect, one of the other, major planks of the post financial crisis reforms, the creation of the international Financial Stability Board (FSB) – has put us in a far better position than ten years ago. The FSB has been active and in crisis mode from the outset of this crisis. It has enabled jurisdictions and international standard setters to work together, under its umbrella to share experience, to assess risks to financial stability, and in to discuss ‘what works’ (and what doesn’t work) in addressing those risks. The FSB’s assessments also provide input to the political level of the G20. And to ensure national authorities respond in a consistent way, the FSB agreed Principles, adopted by the G20, which reiterate commitment to common international standards, using their inbuilt flexibility including buffers, while leaning against regulatory rollback. Going forward, and just as after the global financial crisis, the FSB can and should enable us to bring together the various perspectives in the central bank and regulatory communities to determine whether we do indeed need more resilience in the system and, if so, how to achieve it.