On the other hand, with limited proprietary positions, banks generally emerged from a summer of stress unscathed. Certainly, no one wants to return to the days when major dealers’ trading books were crushed under the weight of worthless leveraged super senior debt. To strike a balance between making banks safer and maintaining adequate market liquidity, we need to draw lessons from the financial crisis, when contagion from stressed banks spread rapidly through the global financial system via counterparty credit concerns, liquidity hoarding and mass deleveraging. In this environment, core funding and OTC derivative markets seized up and conditions were set for the panic that ensued. By contrast, markets with greater transparency and more robust trading and settlement infrastructure, such as equity markets and exchange-traded futures and options, performed rather better. Prices were not always to participants’ liking, but these markets remained open. London should lead the way in ensuring that fixed income and derivative markets meet such standards. At the FSB, the Bank of England is helping to devise reforms that increase transparency, build more robust infrastructure and encourage better collateral management. Since collateral management is a cornerstone of resilient markets and goes to the heart of central banking, let me take a few minutes to expand on it.8 Collateral reduces credit risk between market participants and supports market-based sources of credit to the real economy. It is central to the functioning of OTC derivatives markets and the funding of the shadow banking system.

Properly structured, this creates investment opportunities for British savers, reinforces trading ties for UK firms and improves access to credit for the real economy  13  14  15  6  See the FSB’s “Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities”, http://www.financialstabilityboard.org/publications/r_130829c.htm. Nevertheless, there can sometimes be a case for such action, and the Bank will be considering what it should stand ready to do and in what circumstances. Clearly the Bank should not support any market that would otherwise be unviable. But we have, for example, intervened in the corporate bond market, buying and selling bonds to maintain the market during the crisis until it again became self-sustaining. See http://www.bankofengland.co.uk/publications/Pages/speeches/2013/687.aspx. BIS central bankers’ speeches  across this country. London’s international markets in turn provide a valuable service to the global economy. These benefits, on both sides, will be greatest as part of an open, integrated global financial system. The Bank of England’s task is to ensure that the UK can host a large and expanding financial sector in a way that promotes financial stability. Only then can it be both a global good and a national asset. To those ends, we are working to complete the jobs of making banks more resilient and tackling too big to fail. We are making markets more robust in order to turn the shadow banking system from a source of risk to a pillar of resilience. And we are changing how we backstop private firms’ liquidity management.