by companies and by all of us to buy houses. but it makes banks inherently illiquid. if all depositors decided to ask for their money back at the same time the bank would struggle to pay - out and survive. this is because the bank will generally find it difficult to realise its assets in time. northern rock represented the most extreme case of this, the bank run, starting with wholesale creditors and then on to a full - scale retail creditor run. and it follows from this assessment that banks depend upon maintaining the confidence of their depositors that they will over time be able to meet claims on them. a very important part of maintaining confidence in banks is that the value of their assets – the loans they make, to simplify – has not fallen below their sustainable value in the accounts of the bank. in order to prevent this happening, banks maintain buffers of their own funds – capital – which can be used to maintain the claims of depositors. liaquat ahamed : “ lords of finance ” ( windmill books, 2009 ), p14. carmen reinhart and kenneth rogoff : “ this time it is different : eight centuries of financial folly ”. princeton university press, 2009. bis central bankers ’ speeches here then we have the two fundamental elements of the safety and soundness of banks, liquidity and capital. banks are often said to fail either because they are insolvent ( lack of capital ) or because they are illiquid ( lack of funds to meet the claims of depositors to be repaid ). my own experience of dealing with banks that get into trouble suggests that the reality is somewhat different – it isn ’ t a case of either one or the other. on the whole, banks lose deposits for a reason – depositors worry that there is something going on that they do not like. the film “ it ’ s a wonderful life ” illustrates this point well. rumours spread fast, depositors queue to get their money out while the bank still has funds available. in the film of course james stewart came to the rescue, and he did that by convincing the queuing depositors that they should have faith in his bank. loss of deposits is a symptom of a wider problem – in other words, typically a bank becomes illiquid because its depositors fear a problem which is more often than not to do with the expected future solvency of the bank. i want to put the emphasis here on the word “ expected

a good bit we do not know. 10 this lack of data can impede the design of regulation. there is a long history of data collection focused on banks, and supervisory data have contributed to our quantitative approach to regulation and supervision. for example, when we examine the likely implications of the failure of an institution ’ s largest counterparty, we learn a great deal about the health of that institution and gain greater insight into its connections, through that counterparty, to other institutions. but data on a range of activities – including securities lending, bilateral repos, and derivatives trading – that create funding and leverage risks remain inadequate and hence could prove destabilizing if sufficiently large or widespread. we gain some insight into these markets through our supervisory relationships with the largest bank holding companies, but the activities of important nonbank market participants, such as asset managers, and the interconnections across institutions remain more opaque. efforts are under way to deal with these gaps : the legal entity identifier initiative is working to allow regulators and private counterparties to trace activities by institution ; the ofr, the securities and exchange commission, and the federal reserve are cooperating with the industry to collect data on bilateral repos ; and the fsb has finalized standards for collection of data on securities financing transactions. 11 regulators in the united states and abroad have begun to require the reporting of detailed derivatives transaction data to trade repositories. unfortunately, as a recent report shows, inadequate data standards and limitations on authorities ’ access to trade repository data have prevented the benefits of derivatives trade data reporting from being fully realized. 12 for a discussion of developments in u. s. treasury markets on october 15, 2014, see u. s. treasury and others ( 2015 ). the phrase “ what you don ’ t know can ’ t hurt you ” is well known. according to the oxford dictionary of proverbs, the oldest written version of this saying comes from 1576, in petit palace, by g. pettie ( as noted in miller ( 2009 ) ). ( i am indebted to michael kiley for this reference. ) information on the cooperative effort to collect data on bilateral repos is available on the ofr website. for details on the fsb ’ s standards for collecting data on securities financing transactions, see financial stability board ( 2015c ). see financial stability board ( 2015b ). bis central bankers ’ speeches an illustration of the possible interaction between better data and better policies is the