But what on earth are we doing not only tolerating but effectively encouraging a financial system in which asset managers and banks can’t always understand their portfolios? It is therefore vital that, together with the Basel Supervisors Committee, securities regulators around the world actively implement the FSB’s Principles for reducing mechanistic reliance on CRA ratings.14 In the US, the SEC is embarked on that. But I worry that others, including prudential supervisors, might not grapple with this admittedly difficult exercise in a determined way. The enhanced (meaning better not longer) disclosure by issuers I discussed earlier could make the standard-setters’ task somewhat less difficult. Infrastructure One of the wonderful things about capitalism is innovation. It helps to drive technical progress and higher-living standards. Open economies allow those innovations to spread across the world. Freely flowing capital is essential for this to work in my view. But innovations can take a nasty turn in financial markets when they outgrow their supporting infrastructure. This is an area where the authorities can do good, because there is often a collective action problem. For example, the recent crisis would have been much worse if the authorities, led by the New York Fed, had not “asked” the dealer and fund community to clean up the problem of assignments in credit-default-swap markets in the early years of the last decade. But we need to remember to be ready to step in. The OTC derivative markets are an example where the authorities have had to chase after events.
We cannot afford to ignore capital markets if we are to restore and preserve stability in the UK. The UK’s new macroprudential regime recognises this. The CEO of the planned new market regulator, the Financial Conduct Authority, will sit on the Financial Policy Committee once it is placed on a statutory footing. And the government proposes that the FPC be given power by Parliament to give Recommendations and Directions to FCA where it could develop its policies and rules in the interests of stability. Domestically, internationally, financial stability is a shared endeavour. I am therefore especially grateful for being invited to join you, the securities market community, today in what can only sensibly be the beginning of a collective process. 12  BIS central bankers’ speeches