safety net before turning to the global safety net, let me first say a few words about how the financial regulatory reform agenda in the uk has enabled the strengthening of the domestic safety net – the provision of liquidity insurance to the financial system by the central bank. since the onset of the financial crisis, to keep the financial system open for business, central banks have used their balance sheets as never before. at the bank of england, for example, new published liquidity facilities have been introduced that extend liquidity for longer durations against expanded sets of collateral to new counterparties. 5 as with any kind of insurance, however, liquidity insurance creates incentives to take more of the insured risk. the extent of this moral hazard and how best to tackle it was a key concern for the bank of england when making these changes – it is not the role of the central bank to lend to insolvent institutions. 6 to that extent, the expansion of the provision of liquidity insurance was enabled by reform to the regulatory framework for banks, including : ( i ) micro prudential supervision that raised the levels and quality of capital and liquidity banks are required to hold ; ( ii ) regular, transparent stress testing to ensure an ongoing assessment of solvency under different scenarios ; ( iii ) a credible resolution regime for insolvent banks that reduces contagion to the wider system and the need for taxpayer support. it would be foolish to declare categorically that the bank of england has eliminated stigma or moral hazard. but we can say that these regulatory reforms have made it easier for the bank of england to provide liquidity insurance to solvent institutions. in turn, this has allowed us to increase the availability and flexibility of our liquidity facilities and to give more clarity around the circumstances under which that insurance would be provided. these changes should help to reduce the stigma attached to the use of central bank liquidity facilities, and encourage earlier take - up to limit contagion and protect financial stability during future crises. see hume ( 1758 ). see carney ( 2013 ) and shafik ( 2015 ). see hauser ( 2014 ) and tucker ( 2014 ). bis central bankers ’ speeches 3. are sovereigns like banks? attention more recently has turned to sovereign rather than banking vulnerabilities and two issues in particular have brought this into sharper focus. first, do fundamentally sound emerging market economies have access to the right form of liquidity insurance to deal with the challenges posed by lower growth

minouche shafik : fixing the global financial safety net – lessons from central banking speech by ms minouche shafik, deputy governor for markets and banking of the bank of england, at the david hume institute, edinburgh, 22 september 2015. * * * the views in this speech are my own, and not those of the bank of england. i would like to thank james benford, simon whitaker, ed denbee and glenn hoggarth for their policy analysis and insights ; and chris salmon, andrew hauser, ankita mehta and grellan mcgrath for their comments. 1. introduction it gives me great pleasure to deliver my first internationally themed speech as a central banker in edinburgh on the 30th anniversary of the david hume institute. of course, scots have played a vital role in the bank of england ’ s history – including one william paterson, whose idea it was to set up the bank of england to help put order on the government ’ s finances in the late 17th century. but paterson is perhaps best known for the catastrophic darien scheme – an unsuccessful attempt to establish a scottish trading colony in panama. it has been argued that the failure of the scheme crippled the country ’ s economy – an early example of how troubles abroad can rebound at home 1. scotland also has a tradition of producing internationally renowned economists including, of course, david hume. hume was a great advocate of free trade between nations. his “ of the balance of trade ”, published 34 years before smith ’ s “ the wealth of nations ”, was arguably the first example of modern economic reasoning. in it he railed against the “ numberless bars, obstructions, and imposts, which all nations of europe, and none more than england, have put upon trade ” which “ deprive neighbouring nations of that free communication and exchange which the author of the world has intended, by giving them soils, climates, and geniuses, so different from each other 2. ” what an elegant way to talk about the gains from international trade! the benefits of free trade are now well established. similarly, economic theory provides compelling arguments for the potential advantages of integrated global capital markets based on the efficient allocation of resources. but, in practice, cross - border capital flows can be fickle and flighty, with destructive effects on the real economy. it is fair to say that the case for the free movement of capital took something of a knock following the string of crises since the early 1990s in