An awareness of, and responsiveness to, the needs of the customer, whether saver or borrower. A focus on longterm relationship-building, often starting from the earliest age. A recognition of the benefits of mutualising both risks and returns. In short, the importance of banks being built, first and foremost, on trust. The crisis of trust From the past, then, to the present. A year ago almost to the day, the investment bank Lehman Brothers filed for bankruptcy in the United States. Activity across the globe, financial and non-financial, froze. Recently, there are indications of some thawing. But a year on, many economies around the world remain mired in recession. What explains the severity of this crisis and how much longer can it be expected to last? 4  See E.J. Cleary (1965), “The Building Society Movement”, Elek Books. See also S.J. Price (1958), “Building Societies, their origin and history”, Franey and Company. 5  S.J. Price (1958), “Building Societies: Their Origin and History”, Franey and Company. 2  BIS Review 108/2009  The words “credit crunch” contain the seeds of an explanation. In Latin, credit means trust. So credit crunch is, in essence, a breakdown in trust. Between different parties at different times, that loss of trust has been the root cause of the devastating impact felt globally since the credit crunch began. It also explains why the road to recovery in credit, and thus in the real economy, may be long and winding.
5  See the Annex for brief explanations. BIS Review 44/2007  3  hold tranches of other CDOs, which hold LBO debt of all types as well as asset-backed securities bundling together household loans. (The diagram may, or may not, help!) What is going on here? One possible explanation is that capital might be being allocated to wherever its cost is cheapest for a particular desired risk profile. That optimisation involves comparing the capital charges applied by regulators to regulated institutions; and by rating agencies to various types of vehicle (SIVs, CPDCs, CDOs, monolines etc). The “smart money” seems to be assembling its own portfolio of vehicles, so that it can choose from a menu of where to book transactions. One of the drivers is commonly referred to by practitioners as “ratings arbitrage”. Another was of course Basel I, which triggered the securitisation of high-quality credits, and for quite a few years fuelled a ballooning of vehicles whose existence depended on commercial banks providing zero-capital-weighted “liquidity” lines. Basel II will change all of that. Indeed, if central banks are to understand how the global financial system fits together, we will need to fathom the reconfiguration that Basel II prompts, including the potential for risk transfers between banks adopting different steps on the ladder of Standard, Foundation, Advanced approaches that it makes available.