vanished : trust. or to use the latin word : credit. due to the lack of transparency, no one knew the exact extent of banks ’ exposure to securitised mortgage loans. consequently, market participants began to mistrust one another. at the same time, many banks found it difficult to assess their own exposure, and they began to prepare for the worst. princeton university ’ s markus brunnermeier called this “ a textbook example of precautionary hoarding by individual banks ”. as a result, money market liquidity dried up fast. banks were no longer able to tap into the interbank market to secure their funding. and such a squeeze of liquidity can even break a solvent bank ’ s neck – especially when it is engaged in maturity transformation and is short on liquid assets. at the same time, prices of financial assets began to fall. this induced banks to sell their assets as fast as possible to limit their losses ; everyone was rushing for the exit. this sent the markets into a downward spiral, reducing the sometimes already thin capital cushions of banks. 2. 3 the system breaks down as an interesting matter of fact, dick fuld, then ceo of lehman brothers, knew how essential capital and liquidity were. ” you always need a lot of cash on hand to ride out the storm, ” he used to say. however, the liquidity lehman brothers held was not at all sufficient. and, over the course of 2008, lehman got into trouble, hit by the events i have just described. but how to deal with a large, international and interconnected bank that runs into difficulties? bis central bankers ’ speeches in his book “ capitalism 4. 0 ”, the renowned journalist anatole kaletsky pinned all of the blame for the fallout from the lehman shock on hank paulson, then us secretary of the treasury. to me, this seems unfair. during the crisis, the authorities and market participants were unsettled by the unprecedented pace of events. each impact seemed to send policymakers in a different direction. the rescue of the investment bank bear sterns in march 2008 was the subject of much criticism. the us government was accused of practicing “ socialism for the rich ”. against this backdrop, the government took a harder stance toward lehman brothers. moreover, letting lehman fail was consistent with the fundamental principles of a welldefined market economy – insolvent firms should leave the market. however, no one really knew what needed to

we be better prepared for it than we were five years ago? well, there is no doubt that we have come a long way since september 2008. but we have not yet achieved our objective. what still has to be done? the first priority is certainly to implement the revised regulation ; to implement it consistently across sectors and jurisdictions. 4. 1 not only banks can be too big to fail but there is more on the agenda. in some fields, further conceptual work is required ; just think about the insurance sector. just one day after lehman collapsed, the us government had to invest more than $ 180 billion to bail - out the insurer aig – another institution that was deemed too big to fail. five years later, the regulation of systemically relevant insurers is far less advanced than it is for banks. a relevant framework is slowly emerging, but some groundwork has been done only recently. one of the main issues is that there is still no international capital standard for insurers. however, initial steps have been taken in this regard. and taking a more medium - term perspective, a comprehensive supervisory and regulatory framework for internationally active insurers will be developed, including a quantitative capital standard. 4. 2 out of the shadows – non - bank banking however, there are other areas of bank - like business that are still outside the perimeter of banking regulation. these areas are usually referred to as the shadow banking system. in my view, this term is somewhat misleading and unfair as it implies that institutions operating in the shadow banking system are somewhat shady in character. i would therefore prefer to call them non - bank banks. but, still, it is a place where systemic risks can emerge because of unregulated liquidity and maturity transformation, because of the build - up of leverage, and because of pro - cyclicality. just two weeks ago, the financial stability board provided the g20 summit with new recommendations on how to address these risks. in line with these recommendations, regulation for money market funds is being developed in the united states and the european union. the objective is to reduce money market funds ’ vulnerability to runs by investors. there is still further conceptual work required, for instance in the area of banks ’ relations with the shadow banking system and in the areas of repo and securities financing business. and then, as always, international recommendations are only as good as their implementation. bis central bankers ’ speeches however, in the case of shadow banking, implementation is not the end