Financial economists of course studied banks and financial markets much more closely, but they used predominantly partial equilibrium models and showed less interest in the way the financial system interacted with the wider economy. In fact, the pre-crisis paradigm in macroeconomics predicted neither the onset nor the severity of the crisis in any meaningful fashion for the conduct of policy. Unconditional trust in the selfrepairing capacities of financial markets, or simple neglect, had led to deregulation and lax supervision in the years preceding the crisis. Low quality capital with little loss-absorbing capacity, underestimation of asset risk, excessive and overlooked leverage, ignorance of the interconnections, disregard for the liquidity buffers, low resilience of the funding markets, and pervasive fraud, especially in the sub-prime sector were just a few of the factors that produced the most severe financial crisis since the Great Depression. The evolution of the financial and sovereign debt crises As the crisis unfolded, the interbank funding market dried up and credit availability contracted sharply. Annual credit growth to the private sector fell from 9.3% in 2007 Q4 to –2.1% in 2009 Q3 in the United States and from 8.5% to 0.7% in the euro area over the same period. The effect on economic activity was sudden and significant. Between 2008 Q3 and 2009 Q2, GDP declined by 2/7  BIS central bankers' speeches  3.6% in the United States and by 4.9% in the euro area.
We cannot write a rule to take care of every situation that may occur, and as a forward looking supervisor we are applying judgement in conditions of uncertainty about the future. How firms deal with the uncertainty of the future will also shape their culture. I firmly believe that what we can best do in this area is to provide a clear sense of direction and guidance through open communication starting with those of us at the top, in which we are clear on what we expect of firms. Open and transparent communication of this sort should then be supplemented by the clear understanding that we will all stick to the script. Trust is important. Consumers need to be confident in the firms that they choose to use, and inevitably trust is an important part of that confidence. Likewise, as supervisors, our judgements are inevitably conditioned on whether we can trust the people with whom we deal. Good culture is a product of trust and it matters a lot for both prudential and conduct regulators. Culture is everywhere and nowhere in firms; everywhere in the sense that it is shaped and determined by all the features of the firm – its people, organisation, reward structures etc; and nowhere because culture is not a tangible thing sitting on a shelf that can be prodded and changed of itself.