The reforms of the past 10 years have also strengthened the resilience of the core banking system to liquidity shocks. 3  The illustrative scenario features a peak to trough fall in GDP of nearly 30%. Unemployment peaks at nearly 10%, house prices fall by 16% and Bank Rate is held at 0.1% over the three years of the scenario horizon. 5  All speeches are available online at www.bankofengland.co.uk/news/speeches  5  The major UK banks went into the COVID crisis holding around £ trillion in high quality liquid assets, over 4 times what they had going into the global financial crisis. Their aggregate loan-to-deposit ratio is now below 100%, compared to over 130% in 2007. And they have pre-positioned assets at the Bank of England against which they could draw down around £ of liquidity.4  A simple thought experiment is perhaps the best illustration of this point. A similar pandemic could well have struck in the years before the financial crisis. Had it done so, the overall impact of the FPC stress test would have wiped out nearly all of the aggregate capital in the system and taken banks below their minimum regulatory requirements.5  We would now be dealing with illiquid banks in life preservation mode, cutting back all credit to hoard capital and to remain solvent – in other words a credit crunch and possible bank failures that would make the current economic crisis deeper and the recovery more painful and protracted.
First, as we learned 10 years ago, we need to look at how the system as a whole has performed under stress and whether and how it might be strengthened. Focussing on the resilience of one or another element without understanding its broader effect will give us a false picture. Second, such a comprehensive assessment, cannot be done by one jurisdiction or one international standard setter. And in this respect, one of the other, major planks of the post financial crisis reforms, the creation of the international Financial Stability Board (FSB) – has put us in a far better position than ten years ago. The FSB has been active and in crisis mode from the outset of this crisis. It has enabled jurisdictions and international standard setters to work together, under its umbrella to share experience, to assess risks to financial stability, and in to discuss ‘what works’ (and what doesn’t work) in addressing those risks. The FSB’s assessments also provide input to the political level of the G20. And to ensure national authorities respond in a consistent way, the FSB agreed Principles, adopted by the G20, which reiterate commitment to common international standards, using their inbuilt flexibility including buffers, while leaning against regulatory rollback. Going forward, and just as after the global financial crisis, the FSB can and should enable us to bring together the various perspectives in the central bank and regulatory communities to determine whether we do indeed need more resilience in the system and, if so, how to achieve it.