on sovereign backstops ( chart 2 ). between banks and their supervisors : for too many institutions, concerns over competence, conduct and, ultimately, culture have fed supervisory concerns and built the political case for structural measures, such as ring fencing, or prohibiting certain activities, such as proprietary trading. between supervisors in advanced economies : fearful that support from parent banks cannot be counted upon in times of global stress, some supervisors are moving to ensure that subsidiaries in their jurisdictions are resilient on a stand - alone basis. measures to ring fence the capital and liquidity of local entities are being proposed. left unchecked, these trends bis central bankers ’ speeches could substantially decrease the efficiency of the global financial system. in addition, a more balkanized system that concentrates risk within national borders would reduce systemic resilience globally. between emerging and advanced economies : given that the crisis originated in the advanced economies, the incentives for emerging and developing economies to ring fence their financial systems are particularly pronounced. this has been, at times, supplemented by more active management of capital inflows, further fragmenting the global system. finally, and most fundamentally, there has been a significant loss of trust by the general public in the financial system. there is a growing suspicion of the benefits of financial deregulation and cross - border financial liberalisation, a suspicion that could ultimately undermine support for free trade and open markets more generally. 1 the costs are potentially enormous a global system that is nationally fragmented will lead to less efficient intermediation of savings and a deep misallocation of capital. it could reverse the process of global economic integration that has supported growth and widespread poverty reduction over the last two decades. within economies, the hesitancy of firms to invest reflects in part low confidence that their banks will be there to provide credit through the cycle. reduced trust in the financial system has increased the cost and lowered the availability of capital for non - financial firms. the massive response of central banks has provided some offset but access to credit remains strained. consider fractional reserve banking, which allows banks to transform savings into investments, driving growth and wealth creation. at its core, such banking relies on the trust of depositors, bonds of trust that are so vital they have been reinforced by the state through deposit insurance and supervisory oversight. in turn, the trust between financial counterparties multiplies base money created by the central bank many times, creating an aggregate credit supply that finances our modern economy. when trust in the system is

won, ignoring the consequences of his or her actions on mortgageholders or corporate borrowers. fortunately, there are some signs that global banks are returning to their roots. complex securitisation chains have dissolved. mechanistic reliance on credit ratings is declining. with higher capital requirements on trading activities ( and the prospect of structural restrictions ), traditional lending is looking more attractive. these shifts will promote diverse private sector judgments, reduce cliff effects and build resilience, and possibly over time, a measure of trust. but there arguably has not yet been a full recognition of the need for banks to return to what ed clark calls “ old fashioned banking – activities that help grow their country and communities. ” 4 to do this, some banks may need to reconsider their values. core values the fifth “ c ” – core values – is the responsibility of the financial sector and its leaders. their behaviour during the crisis demonstrated that many were not being guided by sound core values. many in the wake of the crisis looked first to how compensation affects behaviour. indeed, an important lesson was that compensation schemes that delivered large bonuses for short - e. clark, “ building a better banking system for america ” ( speech to chief executives ’ club of boston, boston college, boston, ma, 26 april 2012 ). bis central bankers ’ speeches term returns encouraged individuals to take on too much long - term and tail risk. in short, the present was overvalued and the future heavily discounted. to better align incentives with long - term interests of the firm and, more broadly, society, the fsb developed principles and standards for sound compensation practices. core elements include deferred variable performance payments, paying bonuses in stock rather than cash, and introducing bonus clawbacks. of course, no compensation package can fully align the incentives of a bank ’ s shareholders and its risk - takers. even if such a package could be devised it would not internalise the impact of individual actions on systemic risks, including on trust in the banking system. more fundamentally, to think that compensation arrangements can ensure virtue is to miss the point entirely. integrity cannot be legislated, and it certainly cannot be bought. it must come from within. purely financial compensation ignores the non - pecuniary rewards to employment, such as the satisfaction received from helping a client or colleague succeed. when bankers become detached from end - users, their only reward is money, which is generally insufficient to guide socially useful behaviour. 5