- called greenspan ( or any other kind of ) “ put ” here ; the focus would be not asset prices, but the outlook for spending in the economy and so inflation. this is obviously rather different from a similarly nasty shock producing severe disorder in a banking system that was carrying unduly concentrated exposures of some kind. for a central banker, banks matter because their liabilities are used as money, they are at the centre of the payments system, and they carry an associated asset / liability maturity mismatch. 6 banking system distress is therefore typically characterised by a liquidity run. faced with that, a central bank ’ s instrument – used, where necessary, in collaboration with its regulatory and finance ministry partners – is to supply the system chaplin g, emblow a and michael i ( 2000 ), “ banking system liquidity : developments and issues ”, bank of england financial stability review, december 2000, pp 93 - 112. with an increased quantity of its money, without necessarily changing its price. given the need to take collateral to protect against risk, and to charge a premium to create the right incentives, establishing a routine framework for such operations without creating moral hazard remains “ work in progress ” for the international central banking community. 7 so it would seem that there is a good deal to welcome in the greater dispersion of risk made possible by modern instruments, markets and institutions. but there are most certainly qualifications to such an apparently alluring conclusion. b ) the banking system ’ s residual risk, stress testing and transparency the banking system retains risk in a number of ways, both pre - and post - risk transfer, and its aggregate balance sheet has in fact expanded considerably. 8 pre - risk transfer, banks and dealers hold, or finance, warehouses of portfolios of loans to households and corporates on their way to securitisation, 9 meaning that the banking system can still find itself “ holding the parcel ” when the music stops. post - risk transfer, some risk is contingently retained by virtue of banks and dealers financing the acquisition of risk by hedge funds and others. this entails counterparty credit risk and, taking account of collateral, is akin to writing out - of - the - money put options. so, for me, the question is not so much “ where is the risk? ”, as “ in what circumstances could risk flow back to the banking system? ” ; and “ do banks have enough capital and liquidity to absorb such flows without

banks, as monetary institutions. but as i noted earlier, non - banks – including money funds and finance companies – turned to central banks for liquidity during the 2007 – 08 crisis. the prevalence of non - bank banks as they used to be called, or shadow banks as they are now known, was a deep faultline in the international financial system. things cannot be left where they are. the status quo was deeply unsatisfactory, and if we do nothing it will be made worse by the re - regulation of the banking system, which creates powerful incentives to reinvent the economic substance of banking beyond the perimeter of prudential regulation and supervision. the authorities internationally, led by the fsb and with the active involvement of adair turner and myself, are debating how to tackle the phenomenon of “ shadow banking ”. a preliminary, but i hope substantive report will go to g20 ministers and governors in october. and in the uk, we will be helped by the fpc ’ s responsibility to advise the government on when the perimeter of regulation needs to be altered. deposit insurance and resolution the reforms of deposit insurance are hardly less important. in the uk, there is a push towards the deposit insurer, the financial services compensation scheme, being able to pay out within 7 days. the bank attaches very high priority to this indeed. there is still work to be done. it will entail costs for banks. the weaker standard of 20 days being contemplated by the eu is a serious mistake. that will eventually become apparent when, somewhere in the eu, depositors in a failed bank protest that they are suffering severe hardship from being cut off from their current account for weeks. those are circumstances in which there would be calls for the state to step in to prevent the closure of ailing banks. this highlights the biggest hole in the old social contract – the absence of a regime for resolving distressed banks in a way that avoids both taxpayer support and systemic disorder. how to go about doing this was the principal subject of my speech here two years ago. much has happened since. next month, the g20 financial stability board will publish a consultative document on the resolution of systemically important financial institutions ( sifis ). it will cover resolution instruments ; cross - border co - operation ; and steps needed to reduce obstacles to resolution inherent in the organisation and practices of firms themselves. i will confine myself today to just a few words on the third of those planks. however good the bis