In other professions, such as medicine, prescriptive rules have generated a wood-from-trees problem. They have also caused defensive, backside-covering behaviour. Both may have increased risk in the system. What is true of doctors is almost certainly true of bank supervisors. In the pre-crisis period, being required to monitor many small, rule-based risks may have caused supervisors to overlook potentially life-threatening ones. This ticked-box approach failed to save the banks, just as in medicine it fails to save lives. Supervision suffered the same fate as the autistic savant – penny-wise but pound-foolish. Breaking free of that psychological state calls for a fresh approach, one which is less rules-focussed, more judgement-based. That alternative approach to financial supervision is beginning to be recognised. For example, this approach will underpin the Bank of England’s new supervisory model when it assumes prudential regulatory responsibilities next year (Bank of England and FSA (2011)). Accompanying this will be a streamlined approach to regulatory reporting in the UK. In line with US reporting from the 1860s, more regulatory data will be available “on call”. In future, the limits of Excel will hopefully no longer be tested. This will reduce the complexity quotient, making easier the wood-and-trees task for supervisors. It will also hopefully streamline compliance costs for both regulator and regulated. This approach does not come without risks. As when catching a frisbee or a criminal, catching crises relies on a lengthy sample of past experience. Good supervision means developing well-honed rules of thumb.

By mandating more OTC derivatives to be centrally cleared on CCPs (Central Counterparties), market participants benefit from netting of exposures and reduction of credit risks, ultimately reducing systemic risks. However, without ensuring sufficient access to CCPs before implementing such a mandate, some market participants may find themselves scrambling to sign up with the fewer clearing members who have access to the CCPs. Some may even find the new economics of clearing prohibitive. Such factors should therefore be carefully considered so that in the desire to address possible vulnerabilities, and to cover all bases, perfection does not become the enemy of the good. 11. I have mentioned the important work around coherence. Taken individually, each set of reforms have been well-considered and for good reasons. For instance, the banking capital and liquidity reforms strengthen the ability of banks to better withstand future shocks; OTC derivative reforms seek to improve transparency, prevent market abuse and reduce systemic risks. The two sets of reforms aimed at achieving a safer financial system, albeit from different angles. However, to ensure that they complement each other without creating unintended consequences, we also need to carefully examine how the different elements will interact. 12. Take the example of the impact from the leverage ratio on the capacity of clearing members to offer client clearing services. The leverage ratio is intended to be a non-risk-based backstop to supplement the capital reforms and does not factor in risk offsets.