Markets have become ever more important to people as they bear increasing responsibility for financing their retirements and insuring against risks. The suitability of those decisions will depend heavily on FICC markets. It is therefore vital that they work well. And are seen to do so. The failures of FICC markets Though markets can be powerful drivers of prosperity, markets can go wrong. Left unattended, they are prone to instability, excess and abuse. Markets without the right standards or infrastructure are like cities without building codes, fire brigades or insurance. Poor infrastructure allowed the spark of the US subprime crisis to light a powder keg under UK markets, triggering the worst recession in our lifetimes. –  Poor “soft” infrastructure such as codes of conduct that too few read and too many ignored. –  Faulty “hard” infrastructure like interest rate and foreign exchange benchmarks that were quite literally fixed; and  –  Weak banks whose light capital and heavy reliance on short-term funding created a tinder box. Central banks shared in these failings, operating a system of fire insurance whose ambiguity was anything but constructive when global markets were engulfed in flames. The Bank of England’s general approach was consistent with the attitude of FICC markets, which historically relied heavily on informal codes and understandings. That informality was well suited to an earlier age. But as markets innovated and grew, it proved wanting. Most troubling have been the numerous incidents of misconduct that exploited such informality, undercutting public trust and threatening systemic stability.
Just as the role of a central bank in monetary policy is to take the punch bowl away just as the party gets going, its role in financial stability should be to turn down the music when the dancing gets a little too wild. Still, we should not put all our faith in regulation. It has limits. If the structure of banking creates incentives to take excessive risk then regulators will be overwhelmed by the avarice so vividly captured by Michael Lewis in his book The Big Short. Incentives must be right. One misalignment of incentives today is the implicit guarantee to banks that are “too important to fail”, so that creditors have little incentive to monitor the behaviour of banks because they believe they will be bailed out. This problem is too important to ignore. There is no one simple solution. But we should not shy away from radical reform just because of the opposition of vested interests. So I welcome the setting up of the Banking Commission, with its talented commissioners and a wise and forensic chairman in Sir John Vickers. Let me now return to the quiz question I posed earlier – to what question is 23 the answer? Several plausible answers come to mind. First, 23 is the number of players in England’s World Cup squad in South Africa. Second, it is of course 23 years since England last won the Ashes “down under”.