And the Basel Committee is developing the capital framework to ensure implicit offers of contingent support by banks, for example to their SIVs, will be properly capitalised. Interconnections created by derivatives are being reduced and made transparent. Requirements are being imposed, and incentives created, for banks to centrally clear derivative trades, helping to replace the complex web of bilateral deals with a central model. Trade reporting and margining requirements are being strengthened. More broadly, overall disclosure has been enhanced on the key risks arising from business models, sources of funding, market risk measures and loan forbearance policies.5 Through such initiatives, complexity and obscurity are being replaced by simplicity and transparency. A fairer financial system That goes some way towards increasing the effectiveness of market discipline. But that discipline will never be felt fully if markets believe that creditors and shareholders will be bailed out in a crisis because banks are too big to fail. Expectation of bail out was validated comprehensively last time. The US authorities sought to make Lehman Brothers a test case of moral hazard. Instead, this exception proved the rule. AIG was rescued within twenty four hours. As Barney Frank observed, the free market lasted for a day. This “heads-I-win-tails-you-lose” environment for the world’s largest banks struck right at the heart of the sense of fairness in our societies. It simply had to be fixed. Tackling the rampant moral hazard at the core of the system has not been easy but, at the Brisbane Summit, G20 Leaders marked a watershed in our efforts.

The IMF concluded its latest Article IV Report noting that financial regulation and supervision here is “among the best globally and…a frontrunner in implementing global regulatory reforms”.25 Trust can be sustained only if all countries follow the example of Singapore to implement standards consistently, fully and in a timely way. To provide confidence that full and consistent implementation is taking place, the FSB will support that with rigorous and transparent peer reviews and implementation monitoring. We are providing clear and simple reporting, through the work chaired by Ravi Menon in our Standing Committee on Standards Implementation. In my letter to G20 Leaders last week, I provided that Committee’s latest findings of our monitoring process, in a simple summary with report card. 24  Chart 14, from Haldane (2014), shows the correlation between national savings and investment. That correlation had reached zero just before the crisis, suggesting that the global financial system was fully integrated. However, this has now reversed sharply. Sapir and Wolff (2013) document the home bias in equity markets even within the euro area. 25  IMF (2014b). BIS central bankers’ speeches  11  From next year, the FSB will further enhance this reporting, through an annual reporting process on implementation. This will seek to highlight both shortcomings and good practice, and will seek to assess whether reform measures are having unintended effects and must therefore be adjusted. The FSB’s work will include focus in particular on the effects in emerging markets.