Risks of changing the regulator’s role If you accept the case for detailed rules being made by regulators, the next debate then is over what checks and balances are needed to give stakeholders confidence in the operation of the new framework. Might we pursue the stability of the graveyard by imposing ever more stringent rules? Or might we go the other way, becoming captured by industry and not protecting policyholders enough? Put bluntly, can we be trusted with more power? To address the point about the graveyard head on: I do not for one moment accept the caricature of a rampant regulator intent on crushing the industry under a slow-motion avalanche of new capital requirements, heedless of the wider consequences. History gives the lie to this caricature. Take the topical example of the matching adjustment (MA), which I read in the trade press last month is to be a ‘key battleground’ in the review of Solvency II. The primary effect of the MA is to reinforce the incentives that life insurers have to make longterm investments. It is something that the PRA had to fight hard for in EIOPA, often with little support from other countries. This matching is prudentially beneficial and may make annuities cheaper than they would otherwise be, but of course it also involves taking more risk because it boosts capital levels and lowers capital requirements.
3  But we won’t get there through compliance and risk management alone. We also need businesses – your businesses – to grab the opportunities presented by a post-LIBOR world to meet customer needs in better, safer ways. In the rest of my remarks I want to cover three main topics. First, I want to summarise the business problem LIBOR was originally designed to solve – and how the world has changed since then. Second, I want to sketch some of the opportunities that a post-LIBOR world may bring – and thus why there is a business, as well as a risk, imperative to shift. And, third, I want to explain some steps we at the Bank of England are taking to de-risk our own LIBOR-related business. Why LIBOR once made business sense – and what’s changed LIBOR’s origins date back to the syndicated loan market of the late 1960s. Risky borrowers from developing or emerging markets were looking to raise large sums, in dollars, at term. But the most plausible lenders – US banks – faced two problems. First, rapidly-rising inflation and short term interest rates made it risky to fix the interest rate on such loans for the full term. And, second, caps on deposit rates under ‘Regulation Q’ made it hard for US-domiciled banks to raise the necessary funding. In their place, banks in London – often US-owned, but unencumbered by onshore borrowing limits – formed themselves into ‘syndicates’ to take slices of floating rate, dollar-denominated loans, funded by short-term, offshore dollar deposits.