true finance – ten years after the financial crisis speech given by mark carney governor of the bank of england chair of the financial stability board economic club of new york 19 october 2018 i am grateful to alice carr, james benford and clare macallan for their assistance in preparing these remarks, and to paul brione, chris ford, alex michie, harry jackson and david nicholls for background research and analysis. all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx i. intro last week, global financial policymakers gathered in bali for the annual meetings of the imf and world bank. these meetings came a decade after the global financial crisis, two decades after the asian crisis, and three decades after the latin american debt crisis. anyone spot a pattern? despite the past decade of financial reform, many are asking whether anything has really changed. i am going to argue today that such weary fatalism is at odds with reality. that the radical programme of g20 reforms has made the global financial system safer, simpler and fairer. that these measures are creating a system that can serve households and businesses in bad times as well as good. that true change is creating true finance, a system that can deepen financial inclusion, better meet the needs of ageing populations and help fund the transition to a low carbon economy. but i will also caution that we will forfeit these gains if we once again fall under the spell of the three lies of finance that helped cause the global financial crisis. to resist their siren calls, we must maintain the new institutional frameworks created in its wake. globally, the most important of these is the financial stability board ( fsb ). having agreed all the major international reforms to address the causes of the crisis, the fsb is now pivoting to focus on their timely, effective and consistent implementation. mindful of history, the fsb is also scanning the horizon to identify and address new vulnerabilities that emerge as the structure of our economies and financial systems change. we know we cannot rest on our laurels. financial history rhymes all too frequently, with enormous costs to our citizens. we must remain vigilant, resist the three lies of finance, and reinforce some core financial truths. ii. the three lies of finance “ this time is different ” the first lie of finance is the four most expensive words in the english language : “ this time is different

, with reconciliation to the net and gross values of all fair - valued assets and liabilities. this initiative can be seen as a first, but important, step towards quantifying the intrinsic uncertainty around the valuation of banks ’ asset portfolio. for perhaps the first time, it provides confidence intervals around banks ’ balance sheets – what some have called diamond ( 1984 ). in the language of knight ( 1921 ). epstein and wang ( 1994 ). financial services authority ( 2011 ). these buckets would provide additional granularity, and allow greater comparison across banks, over and above the classification employed by, for example, the ifrs levels 1, 2 and 3. bis central bankers ’ speeches “ confidence accounting ”. 9 the stage is now hopefully set for such principles to be rolled out across europe. for example, the european banking authority ( eba ) is developing binding technical standards on a prudent valuation methodology by end - 2012. these developments are a significant departure from past practices in reporting bank balance sheets. at present, this prudent valuation information will form part of the regulatory return, which may be publicly disclosed. but in time, it would be desirable if it formed part of banks ’ reported annual accounts to maximise investor transparency and consistency. this would parallel the approach used in other realms of public policy to capture economic uncertainty – for example, the “ fan charts ” for inflation and gdp published by the bank of england. bank liabilities and maturity mismatches a second dimension along which banks ’ balance sheets are different is the structure of their liabilities. typically, these have a considerably shorter duration than their assets – in others words, banks engage in maturity transformation. this is one of the main reasons for separate regulatory and resolution rules for banks. but it has a bearing, too, on appropriate accounting rules. to see why, consider a bank with 50 - year assets funded by overnight deposits. the bank intends to hold these assets to maturity. under current rules, holding intent, alongside the characteristics of the assets themselves, is the arbiter of valuation. so those intentions would enable the bank to hold the asset in its banking, rather than trading, book for regulatory purposes. but the liability structure of banks means that holding ability may in practice matter much more than holding intent. for the stylised bank, its 50 - year best intentions could be invalidated within 24 hours. in that event, amortised cost would be a very misleading valuation convention. the bank