deep but pressing questions about the efficiency and effectiveness of capital markets in monitoring and pricing risk. why did boards and investors in bank equity expect such high returns? why didn ’ t the capital markets downgrade the value of bank equity and debt as leverage and other sources of risk increased? why didn ’ t the markets distinguish more between banks? these remarks draw on a chapter contributed to a book, edited by andreas dombret of the bundesbank and professor otto lucius, being published next year. bis central bankers ’ speeches part of the answer, of course, is that around the world the holders of the largest banks ’ debt relied on a public safety net. financial institutions being “ too big to fail ” is the biggest problem we have to crack. but moral hazard isn ’ t a complete explanation, because equity holders surely realised that they were exposed to risk, as events proved. we need richer explanations. agency problems another part of the explanation of the tendency to excess has to be layer upon layer of principal - agent problems. shareholders of joint - stock companies enjoy the upside, but the downside is capped. when we add in the fragmentation of shareholdings, diversified portfolios and relatively liquid markets in equity shares, few shareholders seem to have had the incentive or wherewithal to monitor individual banks effectively. by giving management equity and equity options, shareholders put management in a similar position to themselves. and within the management structure of banks, there were problems in how different layers monitor others, with all to a greater or lesser degree incentivised by contracts – and accounting regimes – that rewarded short - term performance. these problems are compounded by agency issues in the asset - management industry. why didn ’ t investors act to constrain the excessive risk taking at various banks? possibly because their individual stakes were too small for any of them to make a difference. possibly because they believed there were impediments in securities laws or regulation to their acting as a co - ordinated group. possibly because they held back from selling their holdings because they were reluctant to go underweight a large component of an index they tracked ( or were measured against ). how to improve the performance of the asset management industry has been relatively neglected. that matters because in a market economy regulators should not be the first line of defence. myopia agency problems and incentives are not, however, the sole source of exuberance. i doubt that, in managing their banks, many bankers deliberately or even consciously

the financial system, but nonetheless that it would be helpful to facilitate the orderly winding - up of an institution by undertaking what i would call “ mopping up activities ” of a type which only a central bank can typically undertake because it provides a safe house and neutral party. this was the case with barings, in which i was also heavily involved. there is therefore nothing new about bank resolution. why have a resolution regime for banks? why do we need a special resolution regime for banks? the first reason is that at the point when actions have to be taken to deal with a bank in difficulty, there will inevitably be a considerable amount of uncertainty about how bad that bank ’ s problems are. this is because the scale of the problem will depend on how the future unfolds. but we will know at that point that if the authorities don ’ t act, the problems of the institution will quickly get much worse, and a deposit run may well ensue. the second reason for a special resolution regime is that the process of resolution itself must not add to the uncertainty and loss of confidence. put simply, it has to be fast and decisive. most bank resolutions happen over weekends. my overwhelming guiding principle is that by no later than first thing on monday morning we must be able to tell depositors that their money is safe and its new home is … … there is a simple test of this – the answer to the depositor ’ s question “ is my money safe? ” must be yes – no hesitation or qualification can be added. normal corporate insolvency procedures are therefore inadequate for banks for a number of reasons. first, because they can only be initiated at the point of insolvency, whereas a loss of confidence in a bank by its depositors will often precede that point. second, normal insolvency procedures are not well suited to ensuring continuity of key banking functions, particularly access of depositors to their funds, but also the provision of credit. third, a bank failure may involve substantial negative spill over and externalities – for instance to other banks via their inter - connectedness. but in normal insolvency procedures these externalities would not be taken into account when determining what to do in insolvency. fourth, depositors play a special role as creditors of a bank. unlike the creditors of a typical company, they are very numerous in number, most are not professional market participants, and their claims in the bank are in the