In order to put this number in perspective, it is useful to note that the domestic analogue of this figure is 1.6 p.p., and that the overall frequency of crises in the sample is only 3%. 2. Model of monetary and macroprudential policy coordination with market-based finance  Aikman, Giese, Kapadia and McLeay (forthcoming) use a calibrated two-period New Keynesian framework to examine the trade-offs and interactions between macroprudential and monetary policies. Their model includes the possibility that rapid credit growth in the first period leads to a future financial crisis, and analyses the decision facing a policymaker with access to both a macroprudential tool, a countercyclical capital buffer (CCyB), and a traditional monetary policy tool, the policy interest rate. In the variant of the model used for the results shown in Chart 8, some credit is provided by a market-based finance sector, which reduces the effectiveness of macroprudential policy. This model is described by the following set of equations, where all variables except 𝐵1𝐵 , 𝐵1𝑀 (growth rates), 𝛾1𝐵 , 𝛾1𝑀 and 𝛾1 (probabilities) are expressed as deviations from steady state.
9 In March 2016, the FPC raised the countercyclical capital buffer rate to 0.5%, consistent with its view that financial conditions had moved out of the post-crisis phase, and the Committee’s intention to move gradually toward a buffer rate in the region of 1% in a standard risk environment. Following the result of the EU referendum, this rate was reduced to 0% in order to reduce regulatory capital buffers and increase banks’ capacity for lending as the real economy goes through a period of adjustment. 10 Aikman et al (forthcoming). 4  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  4  11  Under a reasonable calibration , a 15pp increase in credit growth in both countries over three years would increase the probability of a crisis by more than 6pp, as shown by the dark blue bars in Chart 3. Were there a reciprocity agreement between the two countries - by which an increase in the countercyclical buffer in one country is applied to lending in that economy by banks in the other country - they would both increase the countercyclical buffer by around 1pp, bringing the probability of a crisis down to only 1.8pp higher than before the shock - as shown in the yellow bars. However, if there were no reciprocity, any tightening of the countercyclical buffer will be partly offset by leakages. The higher buffer would boost resilience by less since foreign lenders in each country would be unaffected, reducing its overall effect on the crisis probability.