A Background Note of the Financial Stability Board.”  22  The Widening Gap: The Great Recession’s Impact on State Pension and Retiree Health Care Systems’, Pew Centre of The States, April 2011. 10  BIS central bankers’ speeches  Summary and conclusions The international reform agenda to make firms more resilient, and especially to address the Too Big To Fail problem, is absolutely essential, the number one priority. But we should take care not to neglect the importance of the rules of the game for capital markets. Once upon a time banks extended and held illiquid loans, overseen by banking supervisors. And in a largely separate universe, securities regulators policed the integrity of individual transactions and offerings on public exchanges served by specialist intermediaries. The growth of private markets, over the counter markets, derivatives, securitization, and banks as intermediaries in capital markets has changed all that, as the crisis cruelly exposed. Banking supervisors are having to recover their historic mission for systemic stability, but this time round that calls for greater attention to markets and, in particular, not simply assuming that what’s in a bank’s trading portfolio and warehouse must be liquid. Securities regulators are having to look well beyond their roots, accepting that their rules and policies influence the resilience of the system. And financial stability authorities, including central banks, have to become as comfortable debating the (hard and soft) infrastructure of core capital markets as they are with, say, the intricacies of the capital structure of banks.

I want to bring out that they are, nevertheless, integral to financial stability authorities. Under each of those headings, I shall raise a few points that have not featured prominently in recent debates. To be clear, I shall not attempt to cover all important markets. And I shall not address important questions about the role of securities regulators in crisis management, circuit-breakers, or counter-cyclical policies such as varying minimum margin requirements as conditions change. Moreover, I must stress that I speak only for myself. The issuance and distribution of securities Toxic ABS and CDOs – cash as well as “synthetic” or derivative versions – were at the centre of the crisis. They were not toxic for the financial system because they were risky or, indeed, because many underlying household and business borrowers became overindebted. Markets can price (and ration) risk they comprehend (if appropriate requiring yields that inhibit issuance). They were toxic because they were mispriced; and they were mispriced in part because they were misunderstood. Through the consequent enticements to leverage, that misunderstanding engulfed banks, asset managers, credit insurers and, eventually, the authorities. Both dealer-financing markets and end-user markets closed. BIS central bankers’ speeches  3  Listing authorities and securities regulation And yet all of those securities were issued and/or distributed under the securities laws and policies of developed countries or financial centres with elaborate securities market regulation. Prospectuses or other documentation had to meet regulatory or listing requirements.