definite improvement in this area. while liquidity risk metrics remain complex and challenging, i believe that there is scope over time to achieve some degree of enhanced, consistent disclosure across institutions. the final lesson is the need for stronger oversight of banks ’ liquidity risk management practices. the authorities ’ role is to preserve financial stability by lowering the probability and impact of bank failures that could threaten the functioning of the financial system more broadly through contagion, spillover and damage to financial networks. there is no incentive senior supervisors group : “ observations on risk management practices during the recent market turbulence ” march 2008. for private banks to bear this cost spontaneously, as their responsibility is to their shareholders rather than to users of the financial system more broadly. the objective of prudential supervision is to correct this misalignment between private incentives and public policy goals, by forcing banks to deliver higher standards of liquidity risk management and to build stronger defences than they would naturally provide of their own volition. that leaves open the formidably difficult question of the level of resilience to liquidity stress that the authorities should seek from individual banks. an answer to this question requires a balance to be struck between the risks to financial stability if resilience is set too low, and the risks of inefficiency of financial intermediation if buffers are set too high. moreover, in addressing this question the authorities also need to take into account that some actions taken today to limit the likelihood and costs of financial instability if risks do crystallise may lead agents to underinsure again future risks. they may thus raise the probability and amplitude of future problems. resolving these issues raises major challenges for the global regulatory community given the strong increase in financial market integration and the substantial growth in internationally active banks. action is underway internationally 7 as well as domestically 8 to improve and strengthen the management and supervision of liquidity risk and to promote greater consistency of approach. the basel committee on banking supervision is working on producing revised sound practices for the management and supervision of liquidity risk. these will be released for consultation in the early summer. the committee of european bank supervisors is undertaking work in parallel. the aim is to strengthen the platform for the management and oversight of liquidity risk. among other areas for improvement, supervisors are driving higher standards for stress testing and subjecting contingency funding plans to more rigorous cross - examination before they are validated. section v : conclusion to conclude, developments in financial markets have increased the

nigel jenkinson : strengthening regimes for controlling liquidity risk – some lessons from the recent turmoil speech by mr nigel jenkinson, executive director, financial stability, bank of england, at the euromoney conference on liquidity and funding risk management, london, 24 april 2008. i am very grateful to emily beau for her collaboration on this speech, and to adrian chiu, andrew bailey, john gieve, laurie roberts and forrest capie for help and comments. * * * section i : introduction commercial banks play a pivotal role in the economy. they facilitate payments and the smooth transfer of goods and services, and they match savers who may lack detailed knowledge of borrowers and who ( generally ) want to be able to withdraw their money at short notice, with borrowers who often wish to repay their loans over a longer term horizon. this “ maturity transformation ” performed by banks is essential to allow capital to be invested in a productive way to support economic growth. but by offering such maturity transformation, banks are inherently exposed to liquidity risk – the risk that a bank is unable to meet its commitments should depositors attempt to withdraw their funds ahead of the bank ’ s capacity to repay them. as many bankers through the ages have found to their cost, the key objective for the management of liquidity risk is the retention of confidence. a bank may be well - capitalised and profitable with a sound loan book, but if depositors lose confidence in the bank ’ s ability to provide their funds as and when they request them, the crystallisation of liquidity risk can bring down an otherwise viable institution in short order. once underway, a liquidity crisis can be very hard to stop. adverse dynamics may feed back on themselves as the limited offer of immediate, full repayment awaits those first to the exit. moreover, liquidity risk can be triggered through the realisation of other risks, such as the disclosure of large and unexpected trading losses, or the discovery of fraudulent activity within the bank. but it is just as likely to develop independently through the simple combination of an inherently vulnerable funding position and a sudden ( and not necessarily rational ) turn in market sentiment. these considerations illustrate why it is of crucial importance to build strong defences against this risk, particularly as the macro - economic and financial market developments of the past few years have in my view led to an increase in many banks ’ overall vulnerability to liquidity risk. and whilst this changing environment has led to distinct improvements in banks ’ efficiency and