But the growth of the more opaque version of these products marks them out, and unmonitored excess could compromise these markets in the future. Recent history is rife with examples of where over-exuberance has led to opacity, severe market difficulties and financial instability (e.g. the rise of CDO2 in the securitisation markets). In such cases, the costs of collapse can easily outweigh the previous benefits. It is important that the authorities monitor the ETF industry and make sure that market participants understand the risks they may be running. It is for that reason that the interim FPC advised the FSA last week that its bank supervisors should monitor closely the risks associated with opaque funding structures, such as collateral swaps or similar transactions employed by ETFs. http://www.bis.org/publ/work343.pdf, http://www.financialstabilityboard.org/publications/r_110412b.pdf and the IMF’s Global Financial Stability Report (http://www.imf.org/External/Pubs/FT/fmu/eng/2011/02/pdf/0611.pdf) respectively). BIS central bankers’ speeches  11  Regulatory responses The financial crisis exposed a need to not just strengthen but to completely re-design aspects of financial regulation, to try to find a solution to “too big to fail” problem and hence minimise the chances of something similar happening again (if financial institutions could fail without large spillovers then much other regulation might be unnecessary). The resulting regulatory agenda is formidable – including agreeing the detailed rules supporting Dodd Frank in the US; EMIR and Solvency II in Europe; the new Basel rules on capital and liquidity including the SIFI surcharge internationally; the final outcome of the ICB in the UK; various FSB initiatives and many more besides.

2/5  BIS central bankers' speeches  Some have called on us to go further and incentivise change through imposing lower capital requirements for ‘green’ exposures and higher capital requirements for ‘non-green’ or carbonintensive exposures. As the prudential regulator, any incorporation of climate change into regulatory capital requirements would need to be grounded in robust data and be designed to support safety and soundness while avoiding unintended consequences or compromising our other objectives. In my view, the case for this has yet to be clearly established and possibly may never be. But our work to improve climate disclosures, scenario analysis, and risk management, could help unlock such assessments. Macroeconomy Beyond the financial system, achieving economy-wide net-zero emissions will require greening the way we heat our buildings, manufacture industrial goods like steel and cement, generate electricity and produce food. This could prove to be an opportunity for the economy to regenerate ageing capital and raise productivity. Analysis done by the Network for Greening the Financial System (NGFS) and National Institute for Economic and Social Research by 2050 suggests that such an orderly transition could lead to some increase in global GDP, and lower unemployment relative to prior trends. These positive effects should be larger in countries like the UK that are net importers of energy. However, as I mentioned earlier, much of that rests on how the transition proceeds. The lesson from previous episodes of structural change is that they never involve a frictionless re-allocation of capital.