Jon Cunliffe: When expectations meet the future

Speech by Sir Jon Cunliffe, Deputy Governor for Financial Stability of the Bank of England, at the London School of Economics, 6 March 2019.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The subject of this symposium is "The Next Great Crisis" by which I think we mean financial crisis.

One of the defining characteristics of humans is our ability to imagine the future, as I shall discuss later. But though we can imagine the future, we cannot know it. And I am a cautious central banker. So I will not today give you my prediction for the origin, shape and extent of the next great crisis.

I am however prepared to make one prediction with confidence. Whatever the trigger and the financial services and instruments most affected, the next crisis will have, somewhere at its centre, losses from an overextension of credit and an adjustment in asset prices.

And, for me, as Deputy Governor at the Bank of England responsible for Financial Stability, an equally if not more important question is not what will the next great financial crisis look like but whether the next and subsequent financial crises will actually be 'great'.

Will the correction of asset prices and the losses on credit be amplified by the financial system and cause the economic and social loss we saw 10 years ago? Or, losses notwithstanding, will the system absorb them without material dislocation to the economy?