Personally, I do not much like the notion of a list of “systemically important firms” because, as a previous generation of policymakers taught us, what proves to be systemic  4  Blunden G, “Supervision and Central Banking”, Bank of England Quarterly Bulletin, August 1987. BIS Review 134/2009  3  depends so very heavily on the circumstances. For example, it judged it safe to let Barings fail because the causes were clearly idiosyncratic and, just as important, the financial waters were calm. But essentially the same group of senior officials judged that it would not have been safe, in the circumstances of the time, to leave unaddressed the distress amongst fringe banks in the Secondary Banking Crisis of the mid-1970s, or amongst small banks in the crisis of the early 1990s. In both cases, actions were taken to stop the problems spreading to larger banks. But I do agree, of course, that banks are woven into the fabric of the financial system in potentially dangerous ways should carry more capital and liquidity than otherwise. That amounts to overturning a consensus that, assessed on an atomistic basis, greater diversification in a bank’s risks is a sufficient reason for lower regulatory requirements. The FSA published some thoughts on this area earlier today. Third – and this is a major departure from the past – we need a regime that recognises that inevitably regulation and supervision is flawed and, occasionally, will prove seriously wanting. However good a country’s supervision, banks and other firms will fail.
The second is that the financial system is a system. One that contains complex and shifting inter-connections. And one that can generate pronounced credit cycles, which even if they initially affect only asset values, eventually can materially affect the real economy. This is why the macroprudential debate is so important. It has been a long time coming. 11 This evening I have outlined some of the Bank’s current thinking on where it might be feasible to develop a toolkit of useful macroprudential instruments. It is not a set of firm recommendations. An open discussion is needed before anyone can reach that point. But I hope it is a useful contribution. We plan to expand on it in a discussion paper over the next few weeks. 11  The beginnings of the macroprudential debate can be traced back at least to Crockett, A (2000): “Marrying the micro- and macroprudential dimensions of financial stability”, BIS Speeches, 21 September 2000. BIS Review 134/2009  11