, policymakers and market participants must bind ourselves to the mast. that means building institutional structures that make it harder to act on the lies. over the past seven years great strides have been made. take “ this time is different ”. to guard against future complacency, policy frameworks have been substantially overhauled. the bank of england has been given formal responsibility to maintain financial stability and has considerable powers to promote it. in anticipation of problems, we have increased bank capital and tightened mortgage standards. we are using our monetary policy and macroprudential policy tools in concert, so that a low for long interest rate environment can promote both price and financial stability. moreover, when next time proves no different, the financial intermediaries at the core of the system will be on a substantially stronger footing. their capital requirements have already increased ten - fold and their liquid assets are up fourfold. their trading assets are down by a third and intra - bank exposures by two - thirds. though we cannot hope to eliminate systemic risk altogether, reform is ending too big to fail for individual institutions. the combination of eliminating the implicit public subsidy and increasing capitalisation will reduce distorted pricing by banks and shift activity to market based finance. choice and competition – real market forces – are increasing. recognising that “ markets do not always clear ” has spurred several initiatives. reform is improving risk transfer by untangling the complex web of derivatives and creating simple, comparable and transparent securitisations. the bank is helping to change the plumbing of markets so that they are more resilient to the failure of individual counterparties, and we are working to understand better the dynamics of market liquidity given changes to regulation, trading strategies and the rise of asset management. bis central bankers ’ speeches the bank has also overhauled the way we provide liquidity by expanding the range of collateral as well as the number and types of counterparties. and recognising that the instability of markets may mean they occasionally seize up, the bank now stands ready to act as a market maker of last resort. and the third lie? in order to help restore trust and fairness, financial reform is re - building real markets. earlier this year, we published the fair and effective markets review. it identified multiple root causes of misconduct in ficc markets that contributed to an ethical drift and an abdication of responsibility. a good start has been made in addressing these shortcomings including through changes to compensation regimes, clarifying

exhaustion of liquidity that caused an extraordinary contraction of economic activity. in addition, liquidity conditions significantly changed the valuation of financial assets, thereby influencing the capital positions of financial institutions. here, i use the term of “ liquidity ” as the concept incorporating both funding liquidity and market liquidity. but i have to admit that “ liquidity ” is hardly defined precisely and measured exactly in a quantitative manner, and thus it remains somewhat elusive. nevertheless, anybody can surely assess “ liquidity ” to a certain extent. after all, liquidity is the core concept in understanding interdependence between the real and financial sectors of the economy from the beginning of central banking. the principal function of central banks has been and will be the guardian of liquidity. from the standpoint just i mentioned, it is crucially important for a central bank to adequately control the aggregate amount of liquidity in the economy. please note, however, that the concept of liquidity here does not necessarily correspond just to the terms of broad monetary aggregates or reserves. in fact, the reversed correlations between money stock and economic activity are almost consistently observed in recent years in japan : money stocks increase when economic activity weakens, while they decrease when economic activity expands. the money multiplier is also quite unstable. challenges for central banks if this is the case, what does it mean practically to say liquidity is important? i will touch briefly upon some issues and challenges for central banks, based upon the recent experiences. first of all, i want to draw your attention to a fine line between liquidity provision and capital provision. currently, central banks are faced with an imminent challenge of implementing unorthodox policy measures. the traditional role of a central bank is in providing liquidity. in times of crisis, a central bank attempts to provide liquidity aggressively sometimes with taking some credit risk. the relaxation of collateral eligibility is a case in point. in a dysfunctional market where prices are not “ discovered, ” it is not so certain that a central bank is protected from credit risk, even if central bank lending is “ collateralized. ” that makes it difficult to distinguish liquidity provision from capital provision. outright purchases of credit instruments imply that a central bank shoulders credit risk in a more straightforward manner. in that regard, monetary policy approaches the region of fiscal policy. under such circumstances, a central bank should be cautious about the risks of undermining its credibility which is prerequisite for any policy implementation