Markets have become ever more important to people as they bear increasing responsibility for financing their retirements and insuring against risks. The suitability of those decisions will depend heavily on FICC markets. It is therefore vital that they work well. And are seen to do so. The failures of FICC markets Though markets can be powerful drivers of prosperity, markets can go wrong. Left unattended, they are prone to instability, excess and abuse. Markets without the right standards or infrastructure are like cities without building codes, fire brigades or insurance. Poor infrastructure allowed the spark of the US subprime crisis to light a powder keg under UK markets, triggering the worst recession in our lifetimes. –  Poor “soft” infrastructure such as codes of conduct that too few read and too many ignored. –  Faulty “hard” infrastructure like interest rate and foreign exchange benchmarks that were quite literally fixed; and  –  Weak banks whose light capital and heavy reliance on short-term funding created a tinder box. Central banks shared in these failings, operating a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings. That informality was well suited to an earlier age. But as markets innovated and grew, it proved wanting. Most troubling have been the numerous incidents of misconduct that exploited such informality, undercutting public trust and threatening systemic stability.

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.