Perhaps more relevant, given the theme of this conference is international ramifications of domestic policies, this research suggests that reciprocity of those policies can further reduce the likelihood of a crisis by more than if countries act alone. Of course the countercyclical capital buffer is just one tool, and its application is limited to banks. So I would like to use the second part of this speech to talk about the financial stability implications of the growth in market based finance in recent years. This growth is welcome, not least because it reduces the reliance of both savers and borrowers on the banking system. But it is not without risks, partly because macroprudential policy for market-based finance is less well developed than that for banks. I will argue that those risks can be 1 2  As quoted in Bush (2012); for ’ole read hole, a handy place to hide one’s money (Grote and Marauhn 2006). IMF-FSB-BIS (2016). 2  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  2  reduced by the development of strong institutions and deep domestic capital markets by the recipients of global capital flows, and by measures to reduce the risk of sudden stops such as those recently proposed by the FSB to address structural vulnerabilities from asset management activities. There are two themes that recur throughout these remarks.
The only exception is that the steady state three-year growth rate of real credit is set to 15% (𝜙0 = 0.15) in order to reflect the fact that global credit growth has been slower and less volatile than that of the UK in the data. For simplicity, 𝜁 is set to 0. The two country model also has additional variables capturing the effect of foreign banks’ lending in the domestic economy, and the effect of global credit growth on the domestic crisis probability. The effect of global credit growth on the domestic crisis probability is set equal to that of home credit growth ℎ𝐵∗ =ℎ𝐵 , broadly consistent with the result in appendix 1 that a 1 standard deviation change in either has a similar effect. The constant term is also adjusted so that, at steady state rates of credit growth, it is equal to the same value as in appendix 2. In the model variant with full reciprocity, 𝜙𝑠𝐹 = 𝜙𝑠𝐻 = −6, implying that there is no leakage of credit growth when the CCyB is tightened, so that it is equally effective at tempering credit extended domestically by home or foreign banks. In addition, 𝑘1 = 𝑘1𝐻 = 𝑘1𝐹 , so that the effective setting of the CCyB is equal to the setting that the national policymaker chooses (𝑘1𝐻 ). In this case the value of 𝑓 has no bearing on financial stability.