It means being ready temporarily to raise regulatory requirements above their minimum level when risks from the economic and financial environment exceed anything remotely calibrated into the standards that apply in broadly normal conditions. And it means promptly relaxing those extra requirements once the risk to stability has passed. This is a massive step. No one is pretending that the policy community knows how to cast it in terms of a numerical target or a uniquely useful set of indicators, against which society can monitor us. And that underlines the importance of Parliament itself approving the instruments granted to the FPC, and of our being sufficiently transparent to enable public scrutiny of and debate about our analysis and policy decisions. The Bank/FSA Discussion Paper on macroprudential instruments published last December was a contribution to that.25 Back to current account imbalances: they do matter But that is not all that we, policymakers, should be modest about. If, as I believe, macroprudential policy can prospectively fill a gap, we must not pretend that it can be a cure for everything. Even if we had avoided the worst consequences of seriously suboptimal gross capital flows – a badly overlevered banking system dependent on flighty wholesale funding – there would still have been the problem of unsustainable global current account imbalances. Whether the eventual adjustment would have been disorderly and how costly is hard to tell.
15  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  15  Annex 1: Charts Chart 1: The Great Moderation in the United Kingdom  Chart 2: G7 debt increased before the financial crisis  Source: IMF data and Bank calculations  16  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  16  Chart 3: Risk of holding mortgage-backed securities perceived to be low; until it wasn’t  Source: UK AAA-rated residential mortgage-backed securities – 5 years spread to swap  Chart 4: Shadow banking has transformed into resilient market-based finance  Source: FSB Global Shadow Banking Monitoring Report * FSB asset management recommendations and MMF reforms (notably EU, US) ** Securitisation reforms, Market intermediation reforms  17  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  17  Chart 5: China’s credit boom in a historical context  Source: BIS data and Bank of England calculations  Chart 6: Markets no longer rely on government support  Source: Moodys and Bank calculations  18  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  18  Chart 7: Our 2017 stress test showed that UK banks could withstand severe UK and world recessions and a market crash  19  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  19