That could be done either by making MMMFs hold capital, which essentially amounts to turning them into de jure banks; or by requiring MMMFs to mark-to-market daily, so that they become Variable Net-Asset Value investment vehicles. In other parts of the shadow banking forest, I hope that we can consider the merits of the industry establishing a Trade Repository for data on what goes on in the securities lending market, including on the reinvestment of cash or securities collateral. While that will sound technical, this is one of the world’s biggest financing markets: firms and the authorities need at least to be able to gauge broadly what is going on. And, to give a third example, I hope that we will treat ostensibly “non-bank” prime brokers as banks if they finance their business with client balances that can be withdrawn on demand. My FPC colleagues will not necessarily agree with all of that, but I hope the examples illustrate that we are not going to focus myopically only on the banking system. “Cyclical” instruments: how does macroprudential policy relate to monetary policy? The cyclical dimension of macroprudential policy is essentially about leaning against credit booms with a view to maintaining financial system resilience.8  7  See Chapter 2 of HMT’s Consultative Document, “A new approach to financial regulation: building a stronger system”, February 2011. 8  I set out the Bank’s developing thinking in this area in Tucker, “The debate on financial system resilience: macroprudential instruments” in the Barclays Annual Lecture, October 2009.
It is for the obvious reason that we need to preserve the key services that the financial system provides to the real economy: payments and transactions deposits; the intermediation of savings and investment via credit and equity; and insurance and risk transfer. In the latest crisis, the payment system was preserved but only at a massive cost to the taxpayer, and even then official support operations could not prevent the severe credit crunch that led to a horrible global recession. That is why we care. And it underlines the importance of ensuring that the system of credit intermediation (and risk transfer), not only the payment system, is robust. Instability and resilience But not every severe interruption in the provision of financial services is the result of instability. Instability is characterised by a problem in one of part of the financial system – a bank, a market, part of the infrastructure-spreading to other parts and threatening to spiral out of control. Financial systems are prone to bouts of instability, due to the inherent fragility of the balance sheets of many participants, together with the complex networks through which they are connected. First, many firms are highly leveraged, meaning that a given fall in the value of their assets has a magnified effect on their net worth; and run significant liquidity risks, so that they can face distress if their liabilities crystallise before their assets. Given opacity about their financial strength, this can leave such firms exposed to runs when the weather turns nasty.