Whether a quake seems likely to occur soon has no bearing on this. For resilience in structures, the best indicator of underlying vulnerability is how close the city is to the fault line or plate boundary. On that basis, Apple’s new California HQ uses new earthquake resilient technology. 3  For resilience in the financial system, it is how much debt there is in the economy (or economies) to which it’s exposed. That’s why, when we come to decide how big the banking system’s buffers of loss-absorbing capital should be, we don’t focus on any economic tremors we may feel. We don’t insist on tougher standards just because trade tensions threaten to slow the world economy or changes in sentiment hit financial markets, or because uncertainty is weighing on the domestic economy. Instead we focus on debt – a key driver of how far up the Richter scale economic earthquakes tend to be. 4 Think of a build-up of debt as being the economic equivalent of building close to a fault line. When a quake hits, the impact is greater and more resilience is needed in the structures. This focus means we can appear contrarian. Debt has a habit of increasing in calm periods, when those in the financial system think it’s safe to take more risks. So we can find ourselves demanding tougher standards when risks are thought by many to be low. And we don’t start demanding them when the tremors start, when risks are thought by many to suddenly be high.
A typical economic earthquake – the sort that tends to occur every twenty years or so – results in a recession and subsequent recovery that leaves economic output after three years just 0.3% below where it was when the shock hit. David Aikman, Jonathan Bridges, Sinem Hacioglu Hoke, Cian O’Neill and Akash Raja, ‘How do financial vulnerabilities and bank resilience affect medium-term macroeconomic tail risk?’, Bank of England Staff Working Paper, forthcoming. 7 This work builds on research at the IMF, with whom we have collaborated closely. Governor Carney used the same analytical approach to consider ‘Capital flows at risk’ – see ‘Pull, push, pipes: sustainable capital flows for a new world order’, speech given at the 2019 Institute of International Finance Spring Membership Meeting, Tokyo, June 2019. 6  8  All speeches are available online at www.bankofengland.co.uk/news/speeches  8  When debt builds up, the distribution of future growth outturns shifts. It skews towards weaker growth. The red line shows how this distribution shifts in response to elevated levels of credit and a wider current account deficit. A 1-in-20 earthquake tends to be more damaging.