much support, and have encouraged, the fsa ’ s plan that all banks should in future hold a minimum level of high - quality government bonds, on the grounds that only they carry a reasonable assurance of market liquidity in stressed conditions. i hope the same approach can be adopted internationally. further, supervisors should be vigilant in ensuring that banks ’ so - called “ treasury ” or “ liquidity ” portfolios are not concentrated in funding instruments, such as frns, issued by other banks. that turns out to have been all too prevalent. and they were not liquid when the music stopped. years ago, regulators decided to deduct banks ’ holdings of each other ’ s capital - instruments, to avoid the system as a whole generating illusory capital. the same principle could perhaps apply in liquidity regulation. the authorities also need to be clear about what level of stress, and / or what proportion of short - term liabilities, the stock liquidity buffer must cover. that must be a judgment for the authorities ; and it must, as the turner report makes clear, be more demanding than in the past. but just as important, we must not imagine that the kind of modelling that can be applied to, say, credit risk and, perhaps, to some types of market risk can sensibly be carried across to liquidity risk. liquidity goes wrong when there is, in the jargon, strategic interaction : i run ( or sell ) because i think you will etc. liquidity buffers need to sustain confidence ; if successful, the buffer is never needed. a time series of data showing low use of a liquidity buffer is not compelling evidence that a requirement was too high. our successors must remember that in 10 - 20 years time. of course, no liquidity buffer can be proof against all circumstances. which is why central banks are in the business of providing liquidity insurance to the system. that insurance needs to be provided on terms that do not incite imprudent liquidity risks, and that are time consistent, in the sense that we avoid needing to recast our regime when really difficult times hit. the bank set out its approach in the paper we issued last autumn on the launch of our discount window facility, through which we stand ready to lend against a wide range of collateral at pre - determined fees to banks that are not facing fundamental problems of solvency or viability. capital, and capital - of - last - resort i have talked

##lled, as we have rediscovered to the global economy ’ s great cost. these objectives – price stability, and banking system stability – are the two key facets of stability in a monetary economy. as recent events show, they can be affected profoundly by conditions in capital markets and in overseas financial systems. focusing ultimately on the stability of our monetary system therefore clearly requires a broad view of financial markets more generally. stability in the elemental sense i have described was profoundly threatened last autumn – when the universal crisis of confidence triggered by lehmans ’ failure tore the fabric of international commerce. that stability has been sustained owes everything to governments stepping in, effectively being prepared to borrow from the future in order to prop up the banking system now. in that sense, we are, of course, “ beyond financial stability ”, insofar as, ordinarily, we would regard instability as a state of affairs that requires such support. the turner report rehearses the analysis of how we got to that point. it rightly places weight on the baleful effects of persistent and cumulative global current and capital account imbalances. i dearly wish that the international authorities had taken on board the lessons from the 1990s eme crises about the vital importance of monitoring, and where necessary managing, national balance sheets – for large countries as well as emes. it is striking, however, that other analysts, including recently from the imf, are starting to play down the part played by the international monetary system. i do not go along with that. there can surely be no disputing that macroeconomic imbalances have mattered greatly to the crisis, as they contributed to the build up of debt and, through the compression of risk - free rates and risk premia, the appreciation of asset prices. but in acknowledging that, we do not have to claim that of themselves such imbalances lead inevitably to financial instability. a necessary condition, in my view, is for faultlines to exist within the financial system itself – and the deeper they run, the greater will be the threat to stability. the identification and mitigation of such faultlines requires engagement with the details of the system. those who argue that it is all down to global imbalances and that we did not need to know about leverage via cdos and the shadow banking system and so on are equally wrong. but the scale of the macroeconomic imbalances that were allowed to accumulate surely raised the bar for resilience of the financial