And the threat of contagion from the parent may remain anyway. There are of course a myriad of shared approaches between these extremes as well. What have we seen in practice? 5  Understanding international bank capital flows during the recent financial crisis; Hoggarth, Mahadeva, Martin; September 2010. BIS central bankers’ speeches  3  I would describe the approach in the run up to the crisis as one of fragmentation – with host supervisors focused on local risk in local entities and home supervisors unappreciative of some of the risks taken overseas. Host supervisors did not fully consider risks from the parent group. Information sharing was fitful. Colleges – gatherings of relevant supervisors – were fairly rudimentary. And while there were some attempts to increase home-host coordination, in practice there were material gaps. This meant that neither host nor home supervisors had sufficient information to assess the risks to domestic financial stability posed by overseas firms. A key lesson we learnt in the crisis as host supervisor was the manifestation of global risks in local entities, and the importance of home-host information sharing and coordination. For example on the wholesale side, Bear Stearns and Lehman both saw problems occur outside their UK operations, where we had little sight of developments, and which led to uncertainty, loss of confidence and a flight of short term wholesale funding. Similar issues arose on the retail side, where some overseas banks had taken significant amounts of retail deposits very quickly whilst others had provided significant lending to UK borrowers.

This degree of interconnectivity between the UK and the rest of the world is such that the IMF noted in 2011 that, “the stability and efficiency of the UK financial system is a global public good due to potential spillovers and thus requires the highest quality of supervision and regulation” 4. As a major host to international financial services activity, we are highly attuned to the importance of international trade and international banking to a successful world economy. Openness and trade support economic dynamism through many different channels. They promote efficient allocation of capital and risk, support greater competition, utilise comparative advantage, expand the size of the global market, and build economies of scale. 1  Why is the UK banking system so big and is that a problem? ; Bush, Knott, & Peacock; Bank of England Quarterly Bulletin 2014 Q4. 2  Prudential Regulation Authority Annual Report and Accounts 2015. 3  Foreign Banks in the US: A primer; Goulding and Nolle; November 2012. 4  Spillover Report on the United Kingdom for the 2011 Article IV Consultation; Country Report No. 11/225; IMF; July 2011. 2  BIS central bankers’ speeches  International wholesale banking has a critical role in facilitating these flows, contributing to the efficient allocation of capital globally, and so developing the world economy. Trade finance is of course essential to support trade. Deep global capital markets benefit savers and borrowers from around the globe. International banking also brings benefits, such as diversification of risks, efficiency, competition, and the advantages of specialisation.