paper will explore these issues in more detail. market liquidity before i talk about liquidity i need first to make some distinctions. liquidity is a very broad term and people mean very different things by it. there are three concepts of liquidity. monetary liquidity ; funding liquidity ; and market or asset liquidity. monetary liquidity captures the looseness of monetary conditions – it is underpinned by the stance of the monetary policy authority. funding liquidity is the ease with which banks and other non bank financial intermediaries can raise funding. and market liquidity refers to the ease with which one asset can be traded for another. all three concepts are tightly related. i am going to focus largely on market liquidity today. market liquidity is in itself a very good thing. it allows investors to transact at a reasonable size at or close to prices prevailing in the market prior to the trade. it contributes to markets that are “ effective ” – by which i mean both fair and resilient. liquid markets play an important role in the financing of investment in the real economy. bonds account for virtually all credit growth since the crisis in the us, uk and euro area. so if market liquidity is a very good thing, can you ever have too much of a good thing? surely any reduction in market liquidity is unwelcome. this question is very pertinent today as it is clear that market liquidity in the system is more fragile, not just in particular market sectors, but also across the system as a whole. dealers are holding less inventory. for example, in us fixed income corporate securities, market maker inventories are half the size they were immediately before the crisis and back at levels seen in the early 2000s even though corporate bond markets have doubled in size since then. how much should we worry about that? if liquidity is always a good thing, how far can we and should we seek to restore liquidity to levels seen before the crisis? this is a question that is increasingly asked of prudential regulators. i think the issue is more complex, however. nothing in life is free and that is most certainly true in financial markets. liquidity comes at a price. and that price is not at all the same for all financial assets. it should reflect the underlying liquidity characteristics of the asset itself and how it is traded. financial assets cannot escape entirely their underlying risk characteristics. financial intermediation and financial engineering can reduce the costs of

even more explosive and damaging in modern, advanced economies and in their interdependent financial systems. and we learned the costs to the real economy when financial stability is lost. gdp per person in the uk is barely above its pre - crisis level. this reassessment both of the probability and of the cost of damage to financial stability is the foundation of this unprecedented reform programme. as we learn how the new regulatory framework operates through the credit cycle we may, nay will, adjust – in any direction – reforms that are not operating as intended. we will do this in consultation with the industry and other stakeholders – the open forum on financial markets which the bank of england will hold on 11 november is an example of this process. but, as the memories of the crisis fade, as they inevitably will, we will not reset our underlying tolerance of risks to financial stability. there is no “ back to future ”. finally, before i leave the banking system, i want to highlight one piece of good news in recent market developments. we have had a number of incidents of extreme market volatility over bis central bankers ’ speeches the past year or so – the removal of the swiss franc peg ; a 30 basis point fall within 90 minutes in ust yields on 15 october 2014 ; the so called ‘ bund tantrum ’ earlier in the year ; and the seizure of us equity markets this summer, against the backdrop of news about china. these have raised a number of issues about changes to market structure and market liquidity. but the one dog that has not barked, however, is the transmission of the shock from these market events to the core banking system that support markets. for example, the reaction in uk banks ’ cds premia to these disruptions has been small and not out of line with broader market movements. i would put this down in no small part to the reforms of bank capital and liquidity that have made banks more resilient. so while money was lost in these market episodes and some people had a very bad day at the office, they did not cause wider shocks in the banking system. and that leads me in to the other subject i want to talk about today – the changes we are seeing in the liquidity of financial markets, which some indeed ascribe to reforms of the capital and liquidity standards in the banking system. i want also to touch upon some of the macroprudential challenges posed by the increase in market based finance. a forthcoming bank staff