The close and complex financial links between the banks also mean that a failure can have a knock on effect on the other banks in the system. Particularly problematic in this respect will be the failure of a bank which has a key position in the payment system. That is, a bank which many other banks use as their intermediary when making payments to one another. The mere rumour that such a bank is having problems can thus paralyse the payment system. A further complication is that banks are vulnerable in a special way. If confidence is shaken, deposits and other financing can usually be withdrawn at short notice. The assets can not be disposed of that easily. A bank may be forced to sell its assets at fire sale prices to meet a run; if the worst comes to the worst the bank may become insolvent. Banks are therefore very sensitive to a shift in confidence. A bank failure can thus affect the smooth functioning of the financial system. The more widespread the problem and the larger the risk of the crisis spreading through the system, the greater is the threat to financial stability – and in the end to the real economy. Clearly, the failure of a bank where a lot of people, companies and other banks have their accounts, and which is an important provider of credit and risk management tools, will normally be more problematic than the failure of a small bank.
Good cop/bad cop Speech given by Sam Woods, Deputy Governor, Prudential Regulation and Chief Executive Officer, Prudential Regulation Authority  Mansion House City Banquet, London 25 October 2018  I am grateful to Ivar van Hasselt and Joanna Keeble for their assistance in preparing this speech and to other colleagues for comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/speeches  Lord Mayor, Ladies and Gentlemen, Andrew and I have worked together for a long time, and we’ve often found it useful to adopt a regulatory good cop/bad cop routine. In the context of Mansion House, the rules are simple: whoever gives the shortest speech is good cop! Now Andrew I timed you just now, and with a few edits I think I can sneak in under the line… But why am I talking about the police at all? Police metaphors are dangerous, but as it happens “good cop/bad cop” is a good analogy for two different aspects of our role as regulator:   First, bad cop: areas where we need actively to insert the public interest into privately or mutually-owned firms, because some of the costs of their failure would be externalised and they therefore have an incentive to run too much risk. Here there is inherently a degree of conflict between regulator and firm – it is the way our system is set up. Capital is the most obvious example of these battlegrounds, where reasonable people with different objectives quite naturally come to different answers.