Bank Capital and Liquidity, Safeguarding Stability

The Bank of England Quarterly Bulletin

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Date Published Q3 2013
Primary Author Marc Fang, Damian Harland and Dan Nixon
Other Authors
Theme Regulation and Supervision of Housing Finance Systems
Country United Kingdom


Over the medium term, there needs to be a fundamental overhaul of the ‘rules of the game’ for the financial system, to deal with the root causes of systemic instability — a tendency for excessive risk-taking during the upswing of the credit cycle and insufficient resilience in the subsequent downturn. An expectation that ‘too important to fail’ firms will receive public assistance, or that unsecured wholesale creditors will not bear losses, exacerbates these risks. A policy response is required across three fronts: regulation, structure and resolution. These measures are complementary and pursuing them together would help establish a policy framework that is robust to future changes in behaviour. Regulatory policies should give greater emphasis to systemic risks, across the cycle and across institutions. They should be complemented by structural measures to contain the spread of risk through the system, whether across firms or business activities. And because institutional failures cannot, and should not, be prevented, stronger resolution tools are required to limit disruption to the wider economy

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