Furthermore, it is arguable that buffers should vary to some extent with the level of risk that a firm brings to the financial system. Firms that, for example, are relatively large or opaque, or have more extensive connections to other parts of the financial system might be expected to meet higher standards under such a regime. The impact of liquidity standards on a firm’s relationship with its central bank, both in normal times and in crisis, also has to be considered. In many countries, the UK included, firms need to obtain central bank money in order to make payments to other banks in the real time gross settlement system and to settle delivery versus payment securities transactions. The ability to obtain central bank money— liquidity—depends at all times on having access to sufficient quantities of high quality collateral. And such collateral is of course amongst the best forms of insurance against liquidity problems. So the extent to which prudential liquidity standards require firms to hold collateral, and the precise way in such requirements are calibrated, have a direct impact on the economics of their participation in payment systems and in central bank operations to implement monetary policy. The structural and conjunctural developments that I described earlier are most material to these questions. On calibration, for example, greater inter-linkages between firms mean that the external costs of failure—the costs that are not borne by the firm itself and are therefore unlikely to be taken into account in its own planning—are greater.

The European Central Bank’s proposed ‘Single List’ will also include certain bank loans; indeed these are already eligible in some member countries. Similarly, the Fed has broadened the range of collateral accepted at the Discount Window. A working group commissioned by the Basel-based CPSS (Committee on Payment and Settlement Systems) in 2004 has examined whether existing arrangements would prove adequate in an emergency. It would appear that some of the infrastructure required to facilitate more extensive crossborder use of collateral is already in place: links between securities settlement systems, for example. Nevertheless, central banks may need to put in place more cooperative and coordinated policies, such as the establishment of a framework for information-sharing. When risks do crystallise it is imperative that central banks, along with regulators and ministries of finance, are well prepared so that they are able to respond in an effective manner. The CPSS working group looked at preparations that are needed in order to be able to make effective use of existing infrastructure in a crisis. But it is equally important that central banks and regulators be in a position to make the decisions necessary for resolution of a crisis, both individually and, when needed, collectively. This entails gathering data and intelligence on firms and markets, sharing it appropriately amongst all relevant public authorities, understanding the systemic conjuncture, and setting up national and international frameworks for coordination of decision making. I could give an entire speech about questions in these areas, and current and potential initiatives to address them1.