this year but of being left behind in the longer term by competitors looms large at the moment. and compensation structures that strongly reward financial performance are also influencing risk - taking. 4 there is a tendency for rewards from generating “ excess returns ” to far outstrip the penalties for poor performance. this intensifies the need to stay ahead of, or keep up with, the pack and stretches risk management systems in the process. the more aggressively management pursues short term shareholder value in the form of rates of return on equity, the greater the motivation to build leverage to meet its targets. balance sheets have been growing strongly ( chart 5 ). in markets where a 20 % return on capital is seen as disappointing, we are seeing efforts to emulate the business models of others and take on more risk through both proprietary trading ( in fairly liquid markets ) and principal position taking ( in illiquid investments ). the history of financial crises is replete with injudicious attempts to “ keep up with the joneses ”. the very first csfi survey in 1994 highlighted the important tension between financial risk and business risk when it observed : “ … that banks are being forced by the quest for new sources of business to become a different sort of financial institution – sometimes without noticing it, and probably without the necessary skills. ” 5 ; as 1987 and 1998 remind us, the best laid hedges and collateral can lose much of their reliability during times of stress. when financial institutions seek to liquidate portfolios to meet margin calls or solvency requirements, their attempts to lower risk exposures can cause a high degree of correlation amongst assets that appeared uncorrelated in normal times. we saw the same phenomenon on a much smaller scale in may and june this year. in less liquid markets the price impact of any shock tends to be larger, the knock - on to balance sheets greater, and the spillover effects across market participants wider. our contacts in financial markets continue to suggest that market liquidity remains plentiful, but that there is a trend towards tying up funds in potentially illiquid assets in markets with relatively few players. and while hedge funds have played a positive role in recent episodes of turbulence – by absorbing some of the losses – their capacity and willingness to provide liquidity in the event of a large shock to the market remains uncertain. to summarise, although financial innovation and macroeconomic stability have strengthened the financial system, the pace of innovation and the battle for market share may have also deepened

andrew g haldane : a leaf being turned speech by mr andrew g haldane, executive director, financial stability, bank of england, to occupy economics, “ socially useful banking ”, london, 29 october 2012. * * * the views are not necessarily those of the bank of england or the financial policy committee. i would like to thank mark cornelius, paul fisher and varun paul for their comments and contributions. the theme for tonight is “ socially useful banking ”. and what better place to discuss it than tonight ’ s venue – the main meeting hall of the friend ’ s house, traditionally the venue for the annual meeting of the quakers. the quaker movement famously gave us two of the uk ’ s largest banks, lloyds and barclays. between them, these banks have almost 600 years of history. for most of that period, no - one questioned their social usefulness. they extended loans to businesses and helped families buy homes. nationally and regionally, they were part of the social fabric. today, that fabric is torn. as the ceos of these two institutions have both recently said, these banks need to rediscover their social usefulness. but this is not only a question for the banks. it is a key issue for wider society too, who have after all felt the financial consequences of banks ’ failings and failures. what do we want our banking system to do? and how do we create that system? this is where occupy enter the picture. it is now over a year since the occupy movement commenced its journey and entered the collective conscience of the public and policymakers. one year on, what has it achieved? some have suggested rather little, that occupy ’ s voice has been loud but vague, long on problems, short on solutions. others have argued that the fault - lines in the global financial system, which chasmed during the crisis, are essentially unaltered, that reform has failed. i wish to argue tonight that both are wrong – that occupy ’ s voice has been both loud and persuasive and that policymakers have listened and are acting in ways which will close those fault - lines. in fact, i want to argue that we are in the early stages of a reformation of finance, a reformation which occupy has helped stir. let me start with the contribution of the occupy movement itself. occupy has been successful in its efforts to popularise the problems of the global financial system for one very simple reason : they are right