The FPC’s judgement is that, if risks were to build above standard, then increasing the CCyB above 2% and bearing this cost would better optimise the balance between primary and secondary objectives. The cost would be warranted because, by building resilience, it would reduce the likelihood and severity of future downturns.28,29 The grey triangles in Chart 18 estimate GDP-at-risk (proxied by the 5th percentile of the forecast distribution of GDP in 3 years’ time, conditional on risks at time t on the x-axis), versus on the y-axis the Bank of England’s 1-year ahead median GDP forecast at time t. The blue line illustrates how this trade-off could have changed if in 2004 capital levels (as measured by the total capital equity ratio) had been increased from 2004 levels. GDP-at-risk in 2004 (proxied by the estimated change in the level of GDP expected by 2007, based on information in 2004, at the 5th percentile of the  27 The CCyB is a particularly powerful policy tool in this regard because it can be removed altogether in a stress. Banks entering the capital conservation buffer, by contrast, are subject to restrictions on their dividends and other capital distributions. 28The FPC’s CCyB decisions are informed by results of the Bank’s annual concurrent stress tests of the UK banking system. These tests provide a gauge of the sensitivity of banks’ balance sheets under stress.
In contrast, the US and the euro area have generally faced Divine Coincidence since the global financial crisis (Charts 9 and 10)  16  All speeches are available online at www.bankofengland.co.uk/news/speeches  16  Chart 8: Divine Coincidence in the UK pre-crisis, but rarely post-crisis  6  Inflation (%)  4  2 -5 -4 Output gap (%)  -3  -2  -1  0  1  2  0  Pre-financial crisis Financial crisis and after  -2  Charts 9 and 10: Divine Coincidence generally held in the US (left chart) and euro area (right chart) 5  Inflation (%)  4.5  4  4  3  3.5 3  2 -8  -6  -4  -2  1 0  Pre-financial crisis Financial crisis and after  Inflation (%)  0  2  2.5  4  Output gap  2 -4.00  -2.00  1.5  -1  1  -2  0.5  -3  0  -4  -0.5  -5  -1  0.00  2.00  4.00 Output gap  Pre-financial crisis Financial crisis and after  Source for Charts 8-10: Bureau of Economic Analysis, CBO, Eurostat, IMF and Bank calculations. 17  All speeches are available online at www.bankofengland.co.uk/news/speeches  17  3. Time horizon Although both committees must promote the government’s economic objectives subject to achievement of their primary objectives, the MPC has very limited ability to influence trend growth. Monetary policy transmission impacts fade after 3-5 years.