Whenever there are difficult issues, outside reviews of the Bank’s performance will be conducted, publicly released and acted upon. Looking ahead The Bank welcomes such scrutiny of our activities, including open debate about the cumulative impact of reform on the functioning of markets. In particular, while the core of the system has been made more resilient, the combination of new prudential requirements on dealers and structural changes in markets has reduced market depth and increased potential volatility. This process likely has further to run, particularly as the normalisation of global monetary conditions edges closer. Firms and regulators should be alert to these developments, including their consequences for investment funds that offer daily liquidity while investing in securities that only appear liquid. To be clear, more expensive liquidity is a price well worth paying for making the core of the system more robust. Removing public subsidies is absolutely necessary for real markets to exist. Volatility characterises such real markets and much of the pre-crisis market making capacity among dealers was ephemeral. However, the possibility of sharp, unpredictable changes in market liquidity poses a clear risk to financial stability, particularly when some  3  See, inter alia, the Record of the FPC meeting held on 20th November 2013, which summarises the outcome of joint work with the FCA on “snap-back” risk; Bank of England (2014), “Stress testing the UK banking system: 2014 results”, December; Bank of England (2014), “The Financial Policy Committee’s review of the leverage ratio”, October.

I would put particular emphasis on the tasks of completing the creation of a credible bank resolution regime that will work on a crossborder basis, and developing effective recovery regimes for key financial market infrastructures. I also agree with Hélène that monetary policy in the United States—given the size of its financial markets and the U.S. dollar’s status as a reserve currency—can have a significant impact on 1/4  BIS central bankers' speeches  global financial conditions, including exchange rates, and that shifts in U.S. monetary policy can lead to consequential shifts in global capital flows. However, it is also important to note that the impact of U.S. monetary policy restraint on emerging market economies (EMEs) has varied widely across tightening cycles. The impact depends on many factors, including EME fundamentals, asset valuations, and the extent and composition of prior capital inflows to those economies. Importantly, the impact has tended to be more benign when U.S. yields rise in response to good U.S. growth prospects. In contrast, spillovers have tended to be more adverse when increased monetary policy stringency is associated with a deteriorating U.S. economic outlook.2 These observations point to the need for the United States to keep its own house in order. Promoting economic growth and financial stability in the United States, I believe, is the most important contribution we can make to promoting growth and stability worldwide. Like nearly all central banks, the Federal Reserve has a domestic mandate set for it—in our case, by the U.S. Congress.