What businesses banks chose to be involved in, and what business entities chose to own a bank, would be matters for themselves to decide. Over time, banks with the right configuration and mix of activities would succeed, while those without would fail or be eliminated by the competition. But regulators cannot leave it entirely to the market to sort out such matters, especially where the banks involved are not peripheral players but perform key roles in deposit taking and the payments system. Strong banks are important to the health of the financial system and to the entire process of credit intermediation. Regulators cannot guarantee that individual banks will never fail, but they have a duty to minimise the chances of a mishap and to maintain the integrity and overall stability of the financial system. A clear source of potential problems in this regard is the commingling of financial and non-financial activities within the same corporate group. Many regulators regard it as good banking and sound supervisory practice to require clear separation of the two. Firstly, separation will limit the risk of contagion from non-banking businesses to the bank. Banks with significant interests in non-banking activities are exposed not just to credit and market risks which are the primary risks of their business, and which the banks should assess and manage as part of their core competence. These banks will also be taking on the business risks of their non-financial activities.
2/5  BIS central bankers' speeches  Stage 2: Normalization The second stage of normalization followed lift-off and has involved two processes: 1) raising the federal funds target closer to more normal levels, reflecting the ongoing improvement in the economy, and 2) gradually reducing the Fed’s balance sheet as we work to unwind the asset purchase policies put in place during the crisis. Let’s start with interest rate normalization. Since lift-off, we’ve raised interest rates as the economy moved toward maximum employment and our 2 percent longer-run inflation objective. We continued this process with our most recent rate increase this week.4 Throughout, we’ve repeatedly stressed that we foresaw this to be a process of gradual normalization, reflecting the balancing of risks to reaching our goals. In particular, downside risks to the achievement of our employment and inflation goals amid very low interest rates were compelling arguments for a cautious and relatively predictable approach to policy. This approach proved its worth: The economy continued to expand at a healthy pace even as the Fed raised rates numerous times. I’ll now turn briefly to the normalization of the balance sheet. We began this process about a year ago.