And it is not comprehensive: it won’t protect pedestrians, and pile-ups will still block important highways to traffic. In macroprudential policy as in road safety: an ounce of prevention can be worth a pound of cure. 34  Crash resilience must be accompanied with standards of driving behaviour that prevent accidents in the first place – with speed limits and a Highway Code. We have applied that principle in the mortgage market. Alongside capitalising banks to withstand a deep downturn in the housing market, we have put guards in place against looser lending standards:  A limit on mortgage lending at high loan-to-income ratios;  And a requirement to test that borrowers can still afford their loan repayments if interest rates rise. 35  These measures guard against lending standards that make the economy more risky; that make what could happen even worse. Debt overhangs – induced by looser lending standards – drag the economy down when corrected. And before they are, high levels of debt make consumer spending more susceptible to the unexpected. 36  So they guard against lenders being exposed to both the direct risk of riskier individual loans, and the indirect risk of a more fragile economy. This multiplicity of effects means there is uncertainty about precisely how much bank capital would be needed to truly ensure bank resilience as underwriting standards loosen. 37  A diversified policy strategy –  speed limits and air bags – is more robust to that uncertainty.
The focus of strengthening the system since the crisis has been on building the resilience of the core banking system. The results have been transformative. A system that could absorb losses of only 4% of (risk weighted) assets before the crisis now has equity of 13.5% and is on track to have overall loss absorbing capacity of around 28%. 32  Our stress tests show that it could absorb a synchronised recession as deep as the financial  crisis. And if signals emerge that what could happen to the economy is getting worse, or the feedback loops in the system that would be set in motion are strengthening, we will go further. 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  But bank capital is not always the best tool to use to strengthen the system and is almost certainly not best used in isolation. It is a classic ‘cure’ – a largely fatalistic approach, taking what could happen in the economy and the feedback loops in the financial system as given, and ensuring they can be withstood. 33  Sometimes we must be fatalistic. We don’t have the means to prevent foreign credit booms, for example. But building resilience into the financial system solely using bank capital is equivalent to addressing road safety only with tougher car safety standards – more airbags – while ignoring standards of driving behaviour. Such an approach is not robust: no airbags will deal with all types of crash.