The same applied to direct regulation of financial enterprises. Other considerations, than returns and risk, took precedence in connection with the provision of credit and capital movements. At the end of the 1970s, direct controls were gradually removed. As a result of the emergence of new financial instruments, the controls no longer had the same effect. There was a growing realisation that the existing controls had a negative effect on the allocation of credit and capital, and hence on longterm economic growth. Cross-border capital movements were gradually liberalised. It was not until the 1990s that capital was able to move between countries as freely as before 1914. Because of the serious effects of financial crises, the financial industry is subject to many regulations and to extensive supervision. The industry is by no means deregulated, but the regulations are now designed to make markets function more securely and more efficiently. Clear requirements have been established for both capital adequacy and liquidity. Nevertheless, the regulations do not eliminate the possibility of financial crises. Are financial crises an inherent feature of today’s system? 7  The transition to a market-based system has increased the scope for financial cycles. The cycles may be amplified by unrestricted cross-border capital flows. Because of the central role of the financial industry as a credit and capital intermediary, this can also influence macroeconomic developments. At worst, an upswing in the economy can be amplified through the build-up of financial imbalances, which may trigger and reinforce a downturn and financial crisis.

What matters is that the system as a whole has the right level of liquidity to cope with volatility in derivatives markets in a stress and that liquidity is in the right place  We need to understand which market participants were caught flat-footed and why. Thanks to post- 2008 liquidity reforms, banks seemed able to handle the liquidity pressures they faced in March, including from margin calls. But non-banks such insurers, pension funds, hedge funds and asset managers have grown in importance over the past decade - we need to examine how well prepared they were to face the liquidity demands around margins. It’s too early to reach policy conclusions. But to preview the options in front of us: It’s possible we’ll want to explore solutions that could reduce the need for CCP margin to rise as much in stress by pre-positioning more liquidity at CCPs during quiet periods. It’s possible we could accomplish this by spreading existing good practices in CCP model design. It’s equally possible we’ll want to focus on better liquidity risk management, particularly for non-banks. This could make sure market participants self-insure against margin calls on their own balance sheets – rather than pre-positioning initial margin at the CCP. Improving transparency around potential margin calls could help support this. It’s possible that we’ll want to do some of both. 10  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  10  The right balance of policy responses will depend on what evidence we find.