The financial crisis is not over yet and international authorities need to be ready to act again if necessary, Bank of England Deputy Governor John Gieve said on Tuesday.
"The package of measures introduced in the UK and elsewhere has improved the prospects significantly, especially for banks but it is too soon to declare the crisis over," Gieve said, according to the text of his remarks.
"Authorities worldwide need to remain vigilant and to be ready to step in again if necessary."
His speech made no direct reference to the outlook for monetary policy but most analysts expect the BoE to cut interest rates sharply over the next few months, starting with another 50 basis point cut to 4.0 percent in November.
Gieve said there were three specific lessons to be learnt from the turmoil of the last 15 months.
First, he said, there was a need to develop "macro-prudential" policies to bridge the gap between monetary policy and the regulation of particular institutions and markets.
There also had to be a better regime in Britain for handling failing banks and there was a need to improve way in which cross-border crises were managed.
He said that what might make sense for one institution might not make sense for the system as a whole.
"In particular we need to establish stronger restraints on the build-up of risks in the financial system over the cycle with the dangers they bring to the wider economy," Gieve said.
"That means not just increasing capital and liquidity requirements for individual institutions but relating them to the cyclical pressures in the system more broadly.
Gieve pointed to the example of "dynamic provisioning" in Spain which requires banks to build up a general loss reserve during good times, based on past experience of likely losses on new lending.
"The effect is to build up reserves when loans are originated which can then be drawn down when the economy begins to deteriorate and actual losses are incurred. That would lessen the need to raise capital in downturns," Gieve said.
"And as draw downs on these general provisions would be automatic, the market should not view this as negatively as reductions in regulatory capital ratios."
He said the improvements to how bank failure should be handled was a key component of the Banking Bill and the Financial Stability Forum has already started work on proposals for better cross-border regulation.
