paul tucker : the state of the markets – four issues remarks by mr paul tucker, deputy governor, financial stability, of the bank of england, at the association of british insurers 2009 biennial conference, london, 9 june 2009. * * * many thanks for the invitation to be here today. the bank greatly values its relationship with the insurance industry. we are just immensely grateful for the intelligence you provide, as asset managers and insurers ; and for our constructive dialogue on policy issues. i have a few brief remarks on four broadly linked issues. the macroeconomic outlook and bank lending since the beginning of the year i have felt that it will take until late autumn at least to have any kind of a handle on broadly what type of outlook we face. my view on that hasn ’ t really changed. of course, over recent weeks near - term indicators, notably the business surveys, have improved a bit. confidence seems to have stabilised. and that has been most obvious in the financial markets, where the really good news is that firms on both sides of the atlantic have been raising funds in the equity and bond markets. but a sense of perspective is needed if those apparently small steps forward are not to be frittered away. inevitably the medium - term outlook remains highly uncertain, and the path back to anything like normality can only be gradual i ’ m afraid. in particular, for the moment it is unclear – as, i must say, it is bound to be at this stage – whether the financial system can generate the expansion of credit that will most likely be necessary to support recovery. the reopening of high - grade bond markets has definitely been encouraging. but in most countries, including the uk, bank lending remains subdued. it is hard to disentangle how much of that is down to weak demand, and how much to tighter supply conditions from the banks. i would just say this. i truly believe that it is in the interests of the banks themselves to ensure that businesses get the working - capital finance they need. while one can imagine, i suppose, individual banks being tempted to sit it out in order to deleverage their balance sheets in an environment that is obviously tougher for them, there cannot sensibly be free riders. if all banks were to adopt such a strategy, recovery might end up being anaemic at best, which would feed back into the banking system itself – increasing defaults and depleting banks ’ capital. not lending would

central banks and financial crises ”, paper presented at the federal reserve bank of kansas city ’ s symposium at jackson hole, wyoming and tucker ( 2009 ), “ the repertoire of official sector interventions in the financial system : last resort lending, market - making and capital ” paper presented at the 2009 international conference : financial system and monetary policy implementation, bank of japan. be an important part of the bank ’ s consultative process led by my colleagues paul fisher and sarah breeden. addressing trade and working capital finance has become all the more important given the reduction in the availability of trade - credit insurance, which our regional agents hear quite a lot about. we therefore welcomed the initiative of that relatively concentrated industry to release a code of conduct, supported by the abi, for handling difficult cases where unnecessary firm distress could be avoided. the bank has followed this carefully given our role as midwife for the london approach designed to help facilitate the orderly resolution of creditor / debtor problems. in a few cases over recent months, as well as over the trade - creditinsurance code, my colleague andrew bailey has played a behind - the - scenes role – the traditional role of providing the bank ’ s good offices where ( and only where ) we can help, and where help is desired by those involved. effective resolution mechanisms are an important back - stop when the system ’ s resilience proves wanting, as recently. developing more resilient capital markets over the medium term, we of course need a much more resilient financial system. this is not just a matter of a better structured, better capitalised, more liquid, more prudently riskmanaged, more transparent, and better regulated banking system ( and i emphasise system ). we also need more resilient capital markets. in the 1980s and into the 1990s the authorities here and elsewhere helped to bring about a number of important structural changes in the market infrastructure : liffe ; reforms at lch ; book - entry transfer, and later delivery - versuspayment, settlement systems ; a wholesale payment system designed to withstand bank failures ; the introduction of the gilt repo market. a lot of plumbing! and proof from the past that, working together, the industry and the authorities can do good. those initiatives were designed to underpin stability in the rapidly evolving capital markets of the day. the current crisis has reminded everyone of the need for the authorities, occasionally and in a welltargeted way, to help remove blockages