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The author traces the development of the term 'macro‐prudential policy' since it was first coined three decades ago. He considers whether the UK Government's planned reforms of the financial regulatory system mean that future threats to UK financial stability are likely to be identified earlier and better than has been the case hitherto. He concludes that there are a number of requirements that the UK Government and the Bank of England will have to fulfill if the reforms are to have that effect and that the scope for action in the UK is inevitably determined in part by similar exercises internationally.

We analyse the determinants of banks' balance-sheet and leverage-ratio dynamics and their role in increasing financial fragility. Our results are twofold. First, we show that there is a value of bank's leverage that minimises financial fragility. Second, we show that this value depends on the overall business climate, the expected value of the collateral and the riskless interest rate. This result leads us to advocate the establishment of anadjustableleverage ratio, depending on economic conditions, rather than the fixed ratio provided for under the new Basel III regulation.