andrew bailey : financial stability – objective and resolution speech by mr andrew bailey, executive director of the bank of england, at the pro manchester business and professional services conference, manchester, 17 march 2011. * * * thank you for inviting me to speak at pro - manchester. it is a pleasure to be here. today, i will talk about the financial crisis that is now in its fourth year, and particularly about the new regime of financial regulation that is being put in place. there is, i am afraid, nothing new about financial crises. on one count there have been sixty different crises since the early seventeenth century, and the first record of a bank panic dates back to at least rome in ad331. a common theme of the antecedents of financial crises is that they begin with a wave of optimism and borrowing among consumers, companies, investors and governments. one of the best modern descriptions of this sequence can be found in a book by the economists carmen reinhart and kenneth rogoff. they summarise the sequence as one where : “ excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. most of these booms end badly ”. 2 reinhart and rogoff ’ s book goes under the title “ this time is different : eight centuries of financial folly ”. their response to the cry of this time is different is to assert that “ it almost never is. ” why, then, is it so hard to understand the true picture of financial crises? i think that the issue here lies clearly in the characteristics of banks. one of the conclusions of work on the history of financial crises is that they have worse outcomes when they involve banks. as an example, if you remember the stock market crash of 1987, which seemed very bad at the time, it did not threaten the banking system, and its effects were contained. it was not a major financial crisis in its own right. the reasons for this difference when banks are involved have to do with the nature of banks. at the heart of banking is a technical term called maturity transformation, or more simply, banks borrow at a shorter term and lend at a longer term in respect of the duration of their deposits and loans. this is the essence of banking. banks transform savings that may be required by their owners at short notice into longer - term loans. this is a benefit to the economy and society because it allows longer - term borrowing

guidance in the form of a remit which would provide greater clarity on the overall approach the bank should take to pursue its objective. that remit is likely to be more a matter of words than a single number like the inflation target, but it is the right approach to seek to set this out as explicitly as possible. there are at least three things that need to accompany such an approach, none of which by the way is unusual to this area of public policy. the first is transparency, namely the clarity of explanation of the objective and how it is pursued. transparency is an important part of the monetary policy framework – the same approach can be used for financial stability. the second necessary tool is accountability to parliament. again, this is a well - established feature of monetary policy and is already well embedded for financial stability. bis central bankers ’ speeches a third necessary element of financial stability policy is to have an approach which recognises the importance of the spirit as well as the letter of the law. i believe lawyers call this a purposive approach to interpreting legislation and regulations – in other words interpreting meaning in the context of regulations rather than a literal interpretation. this is necessary because history shows us that the financial services industry can be addicted to arbitraging regulations – exploiting the rules to suit short term purposes rather than longerterm stability. i want to finish by saying something about a further important feature of financial stability. for me, the most unacceptable aspect of the financial crisis is that large banks have required the support of so much public money. this is often called the too - big - to - fail problem, or better the “ too - important - to - fail - therefore - public - money - has - to - be - used ” problem. why are large banks in this position? the root of this issue is common to the key features of banks, namely their dependence on the confidence of depositors, the role of banks providing each of us with the facility to manage our money – our savings, and in our everyday lives in terms of payments – and the externality caused by the failure of one bank spreading a loss of confidence to other banks. the failure of any company should be dealt with, wherever possible, using the standard insolvency or bankruptcy laws of the country. these provide a well - established and predictable framework for dealing with company insolvency. but, the insolvency laws do not operate quickly – resolving a company can take time. for a