3  4  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  4  In the remainder of my remarks today I want to look, first, at the evolving role of central banks as liquidity providers; second, at the lessons from the dash for cash episode; and, third, at some possible design features and challenges for a ‘new’ generation of central bank tools aimed at market dysfunction. I put ‘new’ in inverted commas because in many cases we are building on the substantial foundations provided by past thinking, given new urgency by our recent experience. I)  The evolving role of central banks as providers of public liquidity insurance  According to Ralph Hawtrey, one of the doyens of early twentieth century economics, the defining feature of central banking lies in taming the ‘inherent instability of credit’.5 And the canonical description of how to achieve that is given by Walter Bagehot’s description of the ‘Lender of Last Resort’ (LOLR), which (in essence) recommends stemming financial panics by lending freely, to sound institutions, against good collateral, and at rates materially higher than those prevailing in normal conditions.6  For much of their lifespan, central banks have provided LOLR primarily to commercial banks. Banks specialise in lending to households and firms, but are inherently vulnerable to liquidity risk, given the maturity mismatch between their long-term assets and their short-term liabilities.

In the rapidly evolving world of Islamic finance, supervisors are also confronted with an even greater task, of keeping abreast with the pace of innovation, taking into account the  BIS central bankers’ speeches  3  uniqueness of Islamic financial contracts in addition to the universal scope of Islamic banking business. This warrants supervisors to recognise the different aspects of risk management in Islamic finance. Islamic financial institutions in most jurisdictions have evolved within the confines of the conventional system and have been accustomed to business practices in their respective jurisdictions. This could result in distinctly different business and risk taking activities. Collaboration among supervisory authorities of such internationally active Islamic financial institutions thus needs to become part of the overall supervisory framework. These efforts would require regular engagement between home and host supervisors to ensure alignment of the supervisory oversight. This will allow for a more holistic evaluation of risks and vulnerabilities for Islamic finance businesses that operate across borders. Effective sharing of surveillance information and assessments of other supervisory issues on Islamic financial institutions is already taking place through bilateral cooperation between supervisory authorities and other informal arrangements. Going forward, a more structured framework for collaboration among supervisors is needed so as to enhance supervisory informational efficiencies, and ultimately, contribute to an effective assessment and early detection of any cross-border risk-transmissions from the group-wide activities. The homehost information sharing can be facilitated through the supervisory college arrangement as an institutionalised mechanism for greater cooperation.