1  For more details, see the Government’s consultation document “A new approach to financial regulation: building a stronger system”, available at http://www.hm-treasury.gov.uk/d/consult_newfinancial_regulation170211.pdf. The interim FPC’s terms of reference can be found at http://www.bankofengland.co.uk/financialstability/fpc/termsofreference.pdf. 2  Both documents are available at http://www.bankofengland.co.uk/financialstability/fpc/meetings/index.htm  3  Including, for example, the major commercial and investment banks, major wholesale dealers, second-tier banks, brokers, platform providers, corporate treasurers, asset managers, pension funds, insurance companies, hedge funds, private equity funds and many more risk managers, speculators, hedgers and end investors. 4  We meet contacts in all the major financial sectors, including London, New York, Boston and the Far East. BIS central bankers’ speeches  1  Today, I want to use the insights gained from our market intelligence work, together with market data, to provide an overall assessment of the state of financial markets, including the extent to which they have recovered since the depths of the financial crisis, the impact of a renewed reach for yield on financial innovation, and the impact of the regulatory agenda on market functioning. The evolution of financial markets during the crisis To set the scene, it is instructive to look at the general pattern in markets over the past few years. Chart 1 uses a “heat-map” to summarise data on issuance and spreads in primary and secondary markets for selected bonds and asset-backed securities (ABS), compared to their historical averages. The widespread panic and financial market seizure of 2008 is clearly visible in the concentration of red and grey segments.

Chart 8 Major UK banks’ unguaranteed term issuance in public markets(a)  Source: Thomson Reuters DataStream  Chart 9 Aggregate SLS repayment profiles  Sources: Bank of England, Dealogic and Bank calculations. (a) 2011 Q2 is up to and including 15 June 2011. Term issuance refers here to securities with original contractual maturity or earliest call date of at least 18 months. This excludes debt issued under HM Treasury’s Credit Guarantee Scheme. (b) It includes subordinated lower Tier 2 and Tier 3 capital instruments with debt features. Despite a number of shocks along the way, markets have been increasing in their resilience over the past two years. For example, UK banks have been able to continue to issue debt in  BIS central bankers’ speeches  5  both public and private markets during 2011, in spite of renewed sovereign debt concerns, the natural disasters in Japan and civil unrest in the Middle East and North Africa.6 Moreover, that issuance has been spread across an increasingly diverse range of instruments including, more recently, UK RMBS (Chart 8). This has helped the UK banks alleviate concerns about the “funding cliff” of official sector refinancing at the end of 2011. For example, it has facilitated the remarkable pre-emptive reduction in the amount outstanding under the Bank’s Special Liquidity Scheme (SLS), from around £ at end-February to just £ at the end of May (Chart 9). Chart 10 Credit Default Swap premia(a)(b)  Sources: Bloomberg, Markit Group Limited and Bank calculations. (a) Five-year senior CDS premia.