That was badly neglected around the western world in the years running up to the current crisis. (And it remains a risk going forward.) Resilience sounds, and is, highly desirable. But it is not a free good. There are trade-offs. And here lies an important contrast with monetary policy. No one seriously believes that there is a trade off in the long run between, on the one hand, inflation and, on the other hand, growth and employment. While a monetary authority can pump up nominal demand to enhance output and employment in the short run, in the long term the impulse is dissipated in a higher price level, with the economy’s real equilibrium determined by real factors alone. But in the financial stability arena, there is a long-run trade off. An economy with a repressed financial system is unlikely to experience financial instability, but it would have plenty of other problems. In consequence, the authorities have to set standards of resilience suited to tail events without impairing the wider functioning of the economy. But we also need to be equipped to raise the required standard of resilience in the light of changing circumstances, notably if we judge the world to have become more threatening than previously foreseen. That is the basis for macroprudential policymakers, such as the UK’s FPC, being able to deploy “cyclical” instruments, as I shall describe later.
The international dimension I have discussed the interaction of the UK’s macroprudential regime with our domestic arrangements for microsupervision and for monetary policy. But the third set of interactions will be with our counterparts in other countries. This is especially important to the UK. London hosts what is probably the world’s most international financial centre. Crucially for us, it is not an entrepot. It is more than an important source of jobs and tax revenues. Many of the overseas firms active in the City are also active in providing services to parts of the UK’s real economy. We therefore have a double stake in their safety and soundness. If they get into distress, there are spillovers to UK financial firms through wholesale markets, but also at least a temporary reduction in the financial services available to UK firms and households. For all these reasons, the UK has a special stake in the adequacy of international standards for financial firms and markets. And, hosting many subsidiaries of major global firms, our supervisors need to play a special role in the collective consolidated supervision of internationally Systemically Important Financial Institutions (SIFIs). This extends into the macroprudential arena. At a global level, we are active participants in the Financial Stability Board. And, regionally, the UK authorities will be engaged in the European Supervisory Authorities. Our Governor is first Vice Chairman of the European Systemic Risk Board (on which I and Adair Turner, Chairman of the FSA, also sit).