with industry and market participants to identify those areas of legal uncertainty with potentially adverse impacts, and, second, by working with market experts to propose solutions. one area in which the fmlc has been active in recent years is in encouraging the development of a smoothly functioning legal framework for cross - border transfers of intermediated securities. in 2005, the committee undertook a thorough analysis of the advantages and disadvantages of harmonisation of the private international law in this area, as reflected in the hague convention. it was, and still is, widely accepted that such harmonisation would contribute to legal certainty by facilitating a clear identification of the law governing the holding and transfer of indirectly - held securities. this is particularly important in the context of the cross - border use of collateral : a key element of banks ’ global liquidity management strategies. early in 2006, the fmlc published a paper that undertook a full analysis of the convention and expressed strong support for its central propositions. the fmlc ’ s work in this ( and other ) areas has been well received and has contributed to the decisionmaking process for government at the national and supra17 national level. indeed, overall, the committee has had some notable successes in addressing and ameliorating legal uncertainty in the financial markets context. concluding remarks to conclude, the rapid structural change in global financial markets is providing considerable benefits to users of financial services, by lowering the costs of financial intermediation and improving the ability to manage and hedge financial risks and tailor financial products. but recent developments also provide new challenges and sources of vulnerability as financial markets become increasingly integrated, and as participants place increased reliance on sustained market liquidity to manage their risks. while financial institutions are in a strong financial position, risk taking has increased and the vulnerability of the financial system as a whole to a sharp change in conditions has risen. against this background, and given the considerable uncertainty regarding how many new complex financial products would perform in more strained market conditions, it is important to improve the analysis and understanding of tail risks through systemic stress tests and thereby strengthen risk management, to ensure that financial institutions retain strong buffers of capital and liquidity, and that investment in the financial and legal infrastructure keeps pace with market developments and thus ensures that it remains robust and resilient.

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