Personally, I do not much like the notion of a list of “systemically important firms” because, as a previous generation of policymakers taught us, what proves to be systemic  4  Blunden G, “Supervision and Central Banking”, Bank of England Quarterly Bulletin, August 1987. BIS Review 134/2009  3  depends so very heavily on the circumstances. For example, it judged it safe to let Barings fail because the causes were clearly idiosyncratic and, just as important, the financial waters were calm. But essentially the same group of senior officials judged that it would not have been safe, in the circumstances of the time, to leave unaddressed the distress amongst fringe banks in the Secondary Banking Crisis of the mid-1970s, or amongst small banks in the crisis of the early 1990s. In both cases, actions were taken to stop the problems spreading to larger banks. But I do agree, of course, that banks are woven into the fabric of the financial system in potentially dangerous ways should carry more capital and liquidity than otherwise. That amounts to overturning a consensus that, assessed on an atomistic basis, greater diversification in a bank’s risks is a sufficient reason for lower regulatory requirements. The FSA published some thoughts on this area earlier today. Third – and this is a major departure from the past – we need a regime that recognises that inevitably regulation and supervision is flawed and, occasionally, will prove seriously wanting. However good a country’s supervision, banks and other firms will fail.

Such frameworks would allow market participants to be better prepared for shocks while allowing regulators and financial stability authorities to be more transparent about our expectations. Whether these frameworks address vulnerabilities from leverage, liquidity mismatch, or liquidity demands from margin calls, they can draw on the building blocks we have used to calibrate LDI resilience. Non-bank frameworks should capture both systemic and idiosyncratic risks. They should account for risks specific to individual participants. In calibration they should draw on the tails of distributions, which include system wide stresses, to calibrate resilience. The timeframes the calibrations are drawn from should consider the options and incentives for raising additional liquidity that are in place, and operational processes should be improved to ensure this additional liquidity can be supplied. Non-banks should not have any impediments to drawing down on their liquidity during stress. Given a suitable framework for addressing non-bank vulnerabilities, the question for financial  Page 7  stability authorities, regulators, and participants, is where should these frameworks be applied? Phrased another way, what activities and which markets are systemic? Some non-bank regulatory frameworks are already being built. UK authorities issued a discussion paper on Money Market Funds (MMFs) last year. [23] And ahead of a consultation paper to be released later this year, the FPC judged that MMFs should be able to withstand severe but plausible levels of investor outflows without amplifying stress and increasing risks to financial stability by holding more liquid assets.