But I don’t think they appreciated, or could reasonably have foreseen, the extent to which it would become absolutely endemic. People around the world now will already have groups working on how to arb Basel III. This is part of freedom; it’s part of capitalism. But it means that the official community needs to be rather more nimble and savvy; knowledgeable about and alert to the byways as well as the highways of our capital markets. That doesn’t mean regulating everything that moves, but it does mean having a capability to adapt our regimes when truly stability-threatening activities move beyond the existing regulatory perimeter. This needs very careful thought. Macroprudential And that brings me to my last heading, which is macroprudential. This means many things. I want to suggest that, most important, it means taking a system-wide perspective to micro regulation; the view that my Bank of England predecessors of 20–25 years ago would have taken. Today there are three elements to it. One, as I just implied, is equipping ourselves with the ability to move the perimeter of microprudential regulation to keep up with the effects of regulatory arbitrage and innovation. The plans that the UK government have in this area would enable the planned new Financial Policy Committee of the Bank of England to make recommendations to government to change the perimeter of financial regulation. The second dimension of a macroprudential regime is maintaining a resilient infrastructure, in the widest possible sense, for our capital markets and banking system to be resilient.
That is a truly terrible choice and so the key thing is to find a new set of measures that can be deployed to give us a tolerable course. That set of measures is what constitutes a resolution regime. It is not about making things perfect. It is about coping. We can all learn from the US’s special resolution regimes in this respect, including the extensions in scope to bankholding companies and non-bank financial firms affected by the Dodd-Frank Act. But there are things being debated in Europe and in the international community that may even supplement the toolbox that exists already in the United States. One of them is the potential ability for the resolution authority to haircut creditors and partially convert debt into equity in what is otherwise a firm with a viable underlying franchise and so potentially a going concern. This would be an adaptation of Chapter 11 regime in the US rather than the standard special resolution toolkit for banks. This set of issues is, at its very core, a cross-border endeavour. We will not get far on this front without much more intimate and trusting co-operation between home country supervisors and resolution authorities and host country authorities. We should not exaggerate the extent to which this has worked well in the past. Supervisors even admit that behind closed doors.