The remaining challenge then is whether the authorities will have the nerve to follow through and carry out a resolution. This is the charge that comes from opponents, namely that it will be “bottled”. I don’t see this as likely to be an issue, because if resolution is a credible route to take, as it will be, why would the authorities want to put the cost somewhere else? 3  John Kay “Should we have ‘Narrow Banking’?” The Future of Finance, LSE Report, 2010  4  Anat Admati and Martin Hellwig: “The Bankers New Clothes: What’s wrong with Banking and what to do about it”. P271  5  Anat Admati and Martin Hellwig: “The Bankers New Clothes: What’s wrong with Banking and what to do about it”. P74–78  BIS central bankers’ speeches  3  Now for supervision and whether it too can function effectively. Make no mistake, in many countries supervision failed badly in the run-up to the crisis. Prudential supervision of banks is all about understanding the risks firms take, the effectiveness of the controls in risk management, using the framework of rules and regulations to create the right incentives to control risks appropriately, and where necessary intervening directly to require actions to be taken that would otherwise lead the firm to a potentially unsafe or unusual position.
If you invest in either of these, you are not promised all of your investment back, though of course you expect to make a positive return. Such an investor ordinarily expects the full return of their investment, but this is not assured. Investment in debt and equity can of course be managed on a collective basis, as asset management. You may remember the Woody Allen quote that a stockbroker is someone “who invests your money until it’s all gone”. Cruel I know, but it illustrates the difference between deposits, other forms of debt and equity. A distinguishing feature of banks is that by providing deposit contracts, far more of their liabilities take the form of value certain contracts. This alone makes capital and solvency critical for banks. In contrast, for asset managers, the contract does not promise such value certainty. Two particular conditions need to be met in my view to make asset management effective and robust to wider economic conditions. First, that there is no lack of clarity of the nature of the assets held under management. Second, that there is no illusion give to investors about  1  Anat Admati and Martin Hellwig: “The Bankers New Clothes: What’s wrong with Banking and what to do about it”. P38–40  BIS central bankers’ speeches  1  liquidity of their assets. It follows therefore that capital and solvency matter much more for bank supervision, and market liquidity conditions matter more for asset management supervision. So bank capital matters a lot.