My assessment is that in terms of understanding the risks and framing possible mitigating actions, we will fare better if we start by focussing on the activities that create such market risk, and then as appropriate move on to the entities that house those activities. The policy response from the authorities is by nature an activity that needs to be carried out through close international co-ordination. The Bank of England is committed to playing its part, consistent with the major presence of financial market activity in the UK, alongside and as a part of the work of the G20 under the auspices of the Financial Stability Board. References Jens H. E. Christensen and James M. Gillan “Does Quantitative Easing Affect Market Liquidity”, Federal Reserve Bank of San Francisco, Working Paper 2013-26. Ingo Fender and Uif Lewrick “Shifting tides – market liquidity and market-making in fixed income instruments”, BIS Quarterly Review, March 2015 http://www.bis.org/publ/qtrpdf/r_qt1503i.pdf Financial Policy Committee: Record of the Meeting, 24th March http://www.bankofengland.co.uk/publications/Pages/Records/fpc/2015/apr.aspx  2015. The Financial Services Authority, “The Failure of the Royal Bank of Scotland: Financial Services Authority Board Report, December 2011. Stanley Fischer, “The Importance of the Nonbank Financial Sector” speech at the “Debt and Financial Stability – Regulatory Challenges” Conference, the Bundesbank and the German Ministry of Finance, Frankfurt 27 March 2015. Grace Xing Hu, Jun Pan and Jiang Wang “Noise as Information for Illiquidity”. The Journal of Finance, XXVIII, No 6 December 2013. Michael Joyce, David Miles, Andrew Scott and Dimitri Vayanos “Quantitative Easing and unconventional Monetary Policy – An Introduction”.

A regime which inadequately evaluated trading book risks was, therefore, fundamental to RBS’s failure.” (FSA (2011)). I do not doubt that the reversal of this capital treatment of trading books has had an impact on dealer inventory levels by increasing the capital intensity. But I don’t accept that the fairly ephemeral position that emerged shortly before the crisis was fit for purpose or sustainable. What are we therefore doing about the fragility of market liquidity and the risks to both financial stability and the state of the real economy that arise from it? First, we are working hard to understand better these risks and how they could manifest themselves. As the Bank of England’s Financial Policy Committee stated at the end of March, our concern is that investment allocations and the pricing of some securities “may presume that asset sales can be performed in an environment of continuous market liquidity.” (FPC (2015)). We are: gathering better data and thus building a greater understanding of the channels through which market liquidity can affect financial stability and economic activity; establishing a better understanding of how asset managers form their strategies for managing liquidity in their funds in normal and stressed conditions (taking into account any increase that might  6  6  Fender and Lewrick (2015) note that “when market volatility rises, standard risk assessment models will signal a market-maker inventory has become riskier. That may prompt the market-maker to further trim its holdings.