These changes include most notably the increasing degree of internationalisation of institutions; the ongoing emergence of more sophisticated and complex new products; the increase in risk transfer processes and, finally, the growing importance of a whole set of risks that not long ago were difficult to quantify. Financial institutions have to respond to these challenges by improving their services to consumers and to society and simultaneously intensifying their efforts in two areas requiring a wide range of actions. First, they have to step up the efforts made to date in designing and implementing robust risk management systems firmly based on corporate governance best practices. In recent years, institutions have become fully aware of their importance and have made considerable headway in this direction, supported by improvements in calculation methods, available technical capabilities and databases, among others. At the same time, they must not neglect the need to invest in human capital, an essential factor in banking. But these investments in technical and human resources - and this is an additional challenge - must not involve any let-up in the pursuit of greater efficiency, which is the key competitive factor in a world of increasingly integrated markets. Financial institutions must therefore redouble their efforts to enhance their capabilities in relation to risk identification and the quantification of committed exposures. They need to design their strategies for managing risk, as well as their capital and liquidity, bearing in mind that economic and financial conditions vary over the cycle.

Neither liquidity from central banks nor the availability of deposit insurance was enough to sustain confidence in ailing banks or to contain the economic costs of failure. Many banks proved to have fundamental problems of solvency or viability. But a number of countries, including most painfully the UK, were exposed as lacking regimes for absorbing the failure of even middle-sized banks. And no country was in a position to cope with the failure of its largest and most complex banks and dealers. BIS central bankers’ speeches  1  The profits from maturity transformation and leverage had been enjoyed, but the authorities’ framework-regulation, supervision and crisis-management – had been found wanting. Partly because banking has evolved beyond the simpler structures contemplated when the existing regulatory framework was conceived. It is timely, therefore, to review progress in redrawing the banking Social Contract. In particular, I shall describe the work underway to return banking supervision to its historic mission of systemic stability, and of the new Financial Policy Committee role in that. Liquidity insurance and shadow banking On central banks’ provision of liquidity insurance, the Bank of England launched new permanent facilities in a series of steps from October 2008 onwards. Through our Discount Window, we stand ready to lend against a very wide range of collateral, including portfolios of raw loans meeting published criteria. Publication of use of the Window is delayed and is confined to aggregate, average use over a quarter, so I trust there is no need for use to be stigmatised.