New products, market practices, and especially technologies are going to emerge; some of these might create new risks that were unforeseen when the post-crisis reforms were developed. As unintended consequences come to light and new risks emerge regulators may need to make changes to regulation over time, what I am going to refer to as ‘dynamic adjustments’. Being open to making such adjustments does not mean undermining the objectives behind the post-crisis regulatory framework or changing the level of resilience in the banking system regulations are aiming for. On the contrary, it is by making dynamic adjustments that we can ensure the regulatory framework continues to deliver on the reforms’ objectives and ensures that the resilience that policy makers injected into the system post-crisis endures. To ensure this is the case we will need to follow a set of principles to guide us towards when it is appropriate to make dynamic adjustments. Principles for making dynamic adjustments  What might these principles look like? Here are my current thoughts. Principle 1: decisions about dynamic adjustments should be made with reference to the objectives of the original regulation and/or of regulators. For the Bank, prudential regulation is relevant to a number of our primary and secondary objectives: most obviously the PRA’s microprudential objectives and the FPC’s macroprudential objectives, but also the MPC’s monetary policy objectives given the role banks play in the monetary transmission mechanism. 9  All speeches are available online at www.bankofengland.co.uk/speeches  9  Principle 2: decisions about dynamic adjustments should be evidence-led.
The typical level of client initial margin for OTC derivatives held by a large clearing member is over $  34  If clients representing  half of the initial margin port, and the others are closed out and lose their entire initial margin, the loss to these clients collectively would exceed $ (Clearly we cannot know what the actual losses would be in any particular event, but we do know that the sums at risk are substantial). The financial stability benefits would have to be set against any possible costs. The risk-weighted capital ratio rather than the leverage ratio is the dominant constraint for many large clearing members. This means that for these firms a change in the leverage ratio to allow initial margin to offset exposure is unlikely to change their resilience at all. But even were a large clearing member to be constrained by the leverage ratio, the effect on capital – and hence on resilience – is small. For instance, for a typical large clearing member, the effect is to change the probability of default estimated by a model that has been used previously by Bank staff to inform discussions about the calibration of capital requirements  35  by between 0 and 8 bps. This takes the probability of default of  this typical clearing member from 1.2% to 1.28% at worst. This illustrates how different pieces of analysis and evidence could be brought together to assess objectively the case for making a dynamic adjustment to an aspect of banking regulation.