10  9  Perhaps the most notable change has been the shift from bank to market-based finance. This was covered in my speech ‘Market finance and financial stability: will the stretch cause a strain?’ 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  By allowing customers to connect to a range of banks and service providers through a single point, Open Banking could open to the door to the ‘unbundling’ of banking. Deposits could become more sensitive to returns. The ability of large incumbent banks to pay less for deposits – a benefit worth £ each year – may come to an end. And it will be easier for customers to separate their payments services from their savings deposits. The Bank of England is playing an active role by giving new non-bank payment service providers (provided they meet appropriate standards) access to the UK’s real time gross settlement system. The first non-bank payment service provider went live a week ago, and a number of others are set to join over the coming months. This means the new payment providers will gain direct access to the UK’s payment systems, including the world-leading Faster Payments service. It should spur innovation in payments, increasing choice and reducing costs for customers. Regulation will need to keep up with this unbundling to make sure the benefits to the economy in the good times don’t bring with them unintended risks in the bad. How?
The lesson here is to look at the economic substance, not the legal form. Securities lending Most accounts of the crisis give a headline role to SIVs, money funds, securities dealers and, as I shall come on to, the RMBS market. There has been rather less daylight, especially outside the US, around the somewhat obscure but very significant role played by the securities lending markets. The vanilla securities lending market is straightforward and important: it intermediates the loan of securities (equities, bonds or whatever) by asset managers to short sellers who need to deliver securities to settle their transactions. Securities lending is absolutely vital to effective market making, and thus to efficient capital markets. Asset managers hold their  4  BIS Review 6/2010  securities with custodians and, ultimately, in Central or International Securities’ Depositaries. Many enter into a service agreement under which their securities can be lent out by an agent. That provides the basis of a parallel, financing market. This is big, perhaps $ 6 at its peak. Say a Treasury Bond is lent out not against collateral in the form of securities but against cash, as is normal in the US market and had been growing in Europe before the crisis. The cash collateral can then employed in the market, ie it is lent to counterparties, usually secured. During the boom, risky assets, including ABS and CDOs, were increasingly accepted as collateral via so-called triparty repo arrangements, under which they were sometimes grouped with more innocuous securities with similar ratings.