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 creditor will not bear losses, exacerbate these risks. The 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 behavior. 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 the disruption to the wider economy. The financial system exists to provide services to the wider economy — payments, credit supply and insurance against risk. A stable financial system should ensure continuity of these services, even when faced with unanticipated shocks. There are two key sources of financial instability, evident in this and previous crises. Cyclical overexuberance — or ‘aggregate risk’ — is brought about by a collective tendency for lenders and borrowers to take on excessive risk during the upswing of a credit cycle, only to become overly risk-averse during the subsequent downswing.