I do not intend today to discuss the merits of the various ongoing regulatory initiatives. Rather I want to briefly comment objectively on their impact on the state of financial markets. It is clear that many individual regulatory initiatives are not yet parameterised or sufficiently detailed for market participants to anticipate their effects fully. And the extent to which regulations might eventually differ across geographical and legal jurisdictions is also still unclear. There is no implied criticism here – re-designing the regulatory frameworks for, among others, banks, insurance companies and rating agencies, takes time, and a lasting, well-planned robust set of regulations that will stand for many years to come is surely preferable to a hastily-agreed but inadequate framework. The authorities nationally and internationally are pushing the agenda hard to come up with the right decisions as quickly as possible. The progress of the regulatory agenda has, however, created additional uncertainty in financial markets which is reflected in investor behaviour and in some market prices. For example, market intelligence suggests that it is one of the factors contributing to the continued elevated funding costs for many banks. In due course, the various regulatory initiatives will produce detailed rules. As that happens one can expect a variety of reactions. On one level, there is likely to be some shift of activity between markets and business models as participants evaluate where the new rules establish new incentives.
Chart 2  Chart 3  Advanced economy corporate bond spreads(a)  Implied volatilities in selected markets(a)(b)  Basis Points 1000 Non-investment grade 900 corporates (RHS) 800 Investment grade 700 corporates (LHS) 600  Basis Points 2500  2000  1500  500 400  1000  300 200  500  100 0 2005 2006 2007 2008 2009 2010 2011  0  Sources: Bank of America/Merrill Lynch. (a) Option-adjusted spreads over government bond yields. Sources: Bloomberg, British Bankers’ Association, Chicago Mercantile Exchange, Euronext.liffe, JPMorgan Chase & Co. and Bank calculations. (a) Three-month option-implied volatilities. (b) Data to close of business on 14 June 2011. (c) WTI crude oil. (d) Average of FTSE 100, S&P 500 and Euro Stoxx 50. (e) Average of five-year on-the-run iTraxx Europe main and CDX North America investment-grade. (f) Average USD/GBP. of  USD/EUR,  EUR/GBP  and  (g) Average of three-month short sterling, eurodollar and Euribor. BIS central bankers’ speeches  3  Chart 4  Chart 5  Bid-ask spreads on selected assets(a)(b)(c)  International equity prices(a)  Corporate bonds  Indices: 2 January 2007 = 100 120  Indices: January 2005 = 100 1400  Government bonds Equities (d)  110  1200  100  1000  90  Commodities Currencies Interest rate swaps  80  800  70  600  Euro Stoxx 60  FTSE All-share  400  S&P 500  0 2005 2006 2007 2008 2009 2010 2011  Sources: Bloomberg, calculations.