resilient, and so better able to maintain credit supply, in the face of threats that could crystallise any time over the next year or so. bis central bankers ’ speeches the fpc also looked at whether any developments in markets might pose a longer - term threat to stability. we were struck that a renewed search for yield is already evident in some markets, and that this is reflected in innovations that could add to the complexity and opacity of the system. the drift of exchange - traded funds away from their original bearings is striking. the bank team have briefed various international bodies, including the financial stability board, on this over the past year. compared with their vanilla forebears, there are now etfs incorporating leverage, active management and synthetic structures. as fpc discussed, it is important for the european securities markets authority to act to ensure that its regime for investment products does not fall further behind. hmt and fsa lead those negotiations for the uk. more locally, fpc asked the fsa ’ s bank supervisors to ensure that banks ’ liquidity management takes proper account of any maturity mismatches associated with using etfs as a direct or indirect source of funding. although the main bank sponsors of synthetic etfs are not currently uk banks, there is a signal here for uk banks – and, in fact, one for our international peers too. as i explained at last friday ’ s fpc press conference, this is part of a bigger issue around the use of collateral swaps or other similar transactions for funding. the authorities have not done enough, in my personal view, to encourage robust practices in repo and securities lending markets. that is likely to form part of the fsb ’ s work on shadow banking. the broader point here is that the fpc will try to nip incipient problems in the bud. if only someone had taken action to contain the mutation of securitisation a decade ago. on each of these fronts, the fpc is acting through the microregulator, the fsa. that is partly because the legislation has not yet passed, and so the statutory powers lie with the fsa. but, more basically, it is because macroprudential interventions will nearly always involve the systematic application of microregulatory instruments in the interests of the resilience of the system as a whole. in the future, that will sometimes involve the financial conduct authority as well as the pra. what is different

between the macroprudential regime we now have and the past is that the fpc will be steering and, once the legislation is complete, recommending and sometimes directing the microregulators to take action. that is a major change in the uk ’ s regime. and it will occasionally mean taking away the punchbowl, leaning against excess. no set of static regulatory requirements will suffice for all seasons. the fpc will be ready to alter regulatory requirements dynamically, so far as the constraints of eu legislation are consistent with actions to preserve stability. 1 conclusion the new social contract for banking insists on resolvability and on the health of the system as a whole. in doing so, the goal is to move towards a financial system that is able to keep lending even during dark times. rapid payout from deposit insurance ; liquidity provision against wider collateral ; constraints on shadow banking to limit regulatory arbitrage ; simplification of sifis ’ internal structures and practices to aid resolvability ; powers for resolution agencies to reconstruct the capital structure of a distressed bank or dealer, to avoid the disorder of orthodox liquidation ; a capital surcharge for sifis ; the fpc temporarily raising capital or liquidity requirements in the face of stability - threatening exuberance – these will all be parts of the new contract. it is unfinished business, but the shape should be clear by the time of the g20 heads of government summit in november. see tucker p m w, “ macroprudential policy : building financial stability institutions ”, april 2011. bis central bankers ’ speeches as you can see, the lessons of the crisis fall into two broad groups : repairs and revolutions. the changes in capital and liquidity regulation, however big, are essentially repairs. they improve on what was there before. there are revolutions on two fronts. resolution regimes. and macroprudential regimes. as i have explained today, both will have a profound influence on supervision. indeed, it is no exaggeration to say that, in the uk, the approach of the future prudential regulation authority to banking supervision is being framed by the needs and goals of resolution and macroprudential oversight. supervisors will focus to a much greater extent than ever before on coping with failure and on the stability of the system. that will become apparent in the years ahead. bis central bankers ’ speeches