Fifteen to twenty years ago, central banks moved wholesale payment systems on to a Real-Time Gross Settlement basis. Cutting through the details, this meant that settlement banks are no longer exposed to each other during the day for the payments they send each other; and, in the UK and most other countries, the central bank delivers this without taking unsecured intra-day credit exposures itself. Without those unheralded reforms, I have little doubt that last autumn’s crisis would have been calamitous on a scale massively exceeding the dreadful near-seizure we did experience in the money markets. That example was a public sector initiative; the banks were more or less herded into it. But there is an equally important private sector initiative. Without the collateralisation of OTC-derivative counterparty credit exposures, the credit spillovers from firm and fund failures around the world would surely have been much greater. What those two examples demonstrate is that the authorities and practitioners can get things right – when we focus on what will matter in bad states of the world. Summary The Turner Report makes a big contribution to developing the agenda for reforming the global financial system, including on macroprudential oversight. If anything, I may have added to that agenda this morning. We need to undertake serious research and analysis on whether we can develop a macro instrument for taming the credit cycle. But, in making the system more resilient, we cannot rely solely on bank capital or loan market requirements.
That insurance needs to be provided on terms that do not incite imprudent liquidity risks, and that are time consistent, in the sense that we avoid needing to recast our regime when really difficult times hit. The Bank set out its approach in the paper we issued last autumn on the launch of our Discount Window Facility, through which we stand ready to lend against a wide range of  BIS Review 39/2009  3  collateral at pre-determined fees to banks that are not facing fundamental problems of solvency or viability. Capital, and capital-of-last-resort I have talked about liquidity partly because, as our community returns to thinking about bank supervision in terms of stability as well as consumer protection, it needs to be centre stage again; but also because we can think about capital regulation under the same broad headings. What should count as capital; what risks should it protect against; and what happens when the system turns out not to have enough capital? On the definition of capital, I agree with the Turner Report that what matters to stability is common equity (and possibly, subject to further analysis, also instruments that can unambiguously be converted into common equity at the option of the bank or regulator). That is because confidence in a bank as a going concern is crucial to the stability of its deposit and wholesale funding base.