That weighs with me both as a matter of principle, and because minds have been concentrated by the planned transfer to the Bank of responsibility for micro prudential supervision of banks. A system in which our bank supervisors were the next line of  7  Adrian, Tobias, and Hyun Song Shin (2010), “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007–09”, Annual Review of Economics 2: 603–18. 8  Gorton G B and A Metrick (2009), “Securitized banking and the run on repo”, NBER Working Paper 15223. See also Shleifer’s comments on Gorton and Metrick “Regulating the Shadow Banking System” BPEA, Fall 2010. 4  BIS central bankers’ speeches  defence after management would be badly designed. We need to set rules of the game that harness boards, shareholders, auditors and, in today’s context, crucially bondholders to the cause of preserving the safety and soundness of the firms they run, monitor and finance. Adair airs some questions about reliance on resolution. Namely, (i) the incidence of failure amongst the largest and most complex firms is so rare that, over time, participants in financial markets will forget it can happen; and (ii) that when such a firm does fail, the spillovers will be so great that the market will expect it to be bailed out, validating the myopia. Those arguments seriously underestimate the determination of policymakers in this area.
Perhaps the first point to make is that Lehman was allowed to fail, even though no one can seriously have been in much doubt about the severity of the consequences. In a democracy, interventions are sometimes severely constrained. It would be myopic for market participants to set aside the probability of that happening again. In fact, I doubt markets will forget for a long time. And arguably one can see awareness of this risk in bank debt spreads today and in the movements following policy consultations in Europe and the US on “bailin” and resolution reforms. But, secondly, the idea of not equipping ourselves with better tools for the “last chance saloon”, when all else had failed, would be a counsel of despair. Adair must be right, though, that we will need to build credibility for our commitment to resolve rather than bailout. That means building institutions to underpin that commitment. Idiosyncratic failures do occur. We can – and where appropriate should – prospectively apply the same resolution tools to the failure of medium-sized firms as we are developing for the largest global firms, demonstrating our willingness to use them. Living wills – or, as they are now called, Recovery and Resolution Plans – will help, provided they have teeth. Which means ensuring that firms are organised and structured to permit effective resolution of different kinds of business line. And a prompt-intervention supervisory action regime can be designed to limit the scope for regulatory forbearance.