But capital ratios have declined and leverage has risen. Immediately prior to the crisis, leverage in the banking system of the industrialised world had increased to astronomical levels. Simple leverage ratios of close to 50 or more could be found in the US, UK, and the continent of Europe, driven in part by the expansion of trading books (Brennan, Haldane and Madouros, 2010). And banks resorted to using more short-term, wholesale funding. The average maturity of wholesale funding issued by banks has declined by two thirds in the UK and by around three quarters in the US over the past thirty years – at the same time as reliance on wholesale funding has increased. As a result, they have run a higher degree of maturity mismatch between their long-dated assets and short-term funding. To cap it all, they held a lower proportion of liquid assets on their balance sheets, so they were more exposed if some of the short-term funding dried up. In less than fifty years, the share of highly liquid assets that UK banks hold has declined from around a third of their assets to less than 2% last year (Bank of England, 2009). Banks tested the limits of where the risk-return trade-off was located, in all parts of their operations. As John Kay wrote about his experience on the board of HBoS, the problems began “on the day it was decided that treasury should be a profit centre in its own right rather than an ancillary activity” (Kay, 2008).
First, the central banks’ objective of financial stability has emerged in the course of the historical evolution of their legal mandates and responsibilities. Second, the application of macroprudential tools to safeguard financial stability requires, as a pre-condition, knowledge of the financial cycle. Third, our conference programme is organized so as to discuss this critical topic in a conceptual sequencing: starting from the global view, elaborating on the euro area, and then turning to the financial cycle in non-euro area 2/3  BIS central bankers' speeches  Europe. I believe our speakers and discussants will provide both theoretical insights and first-hand policy experiences, from global and regional perspectives, for all of us to benefit from a frank exchange of ideas and relevant practices today. Thank you very much once again for joining us and participating in this conference, and I wish you a very pleasant and productive stay in Sofia. More information about the event you can find here. 1 See F Capie, C Goodhart and N Schnadt, “The development of central banking”, in F Capie, S Fischer, C  Goodhart and N Schnadt, (eds), The future of central banking: the tercentenary symposium of the Bank of England, Cambridge University Press, 1994, p 6. 3/3  BIS central bankers' speeches