He considers the design of future banking regulation and the more urgent need to recover from the present crisis.
The Governor states that at the heart of the crisis was an inability to perceive the true nature of the risks involved, which has been a persistent feature of crises over time. He notes that all forms of regulation, whether light or heavy touch ".failed to some degree to prevent the accumulation of risks. So it is unlikely that there is a simple answer". The Governor stresses that regulation should be "simple and robust". Regulatory design, he says, ".should be based on an explicit identification of the market failures that regulation can hope to correct". He highlights the need to reduce the exposure of the financial system to domino effects - arising from the interconnectedness of banks - and the pro-cyclical behaviour of risk-taking in the financial system. He says, "In particular, the authorities should maintain a clear focus on the issues that matter when the worst occurs - liquidity and leverage." He adds, "Given what has happened there is now international support for developing a counter-cyclical toolkit for the prudential supervision of banks."
Press release