That should leave default risk more readily monitorable and more efficiently priced. We should therefore see an enhancement of banks’ and investment houses’ credit analysis functions and more trading of credit differentials. My second question was how much will be traded in a post-EMU world? This is not an easy question to answer. Volumes are difficult to predict. On the one hand, EMU may bring about a more stable interest rate environment, as well as eliminating national interest rates and exchange rates, reducing the need for hedging mediums and hence for derivative products. On the other hand, increased liquidity in the euro bond markets could encourage business and we could well see new participants entering the capital and derivative markets. My hunch is that the latter possibility is more likely. And that the market for carefully constructed derivatives contracts, properly sold to customers with a genuine need for them, will continue to expand. BIS Review 67/1997  -5-  That brings me to my third question, where will the trading be done? I do not think that there is a determinist answer to this question. Nor, certainly, should it be a matter of decision by politicians, central bankers or financial regulators. Certainly, our predisposition is to think that competition will and should determine where business is done and the outcome will depend on the imagination and effort of the managers and controllers of the different markets. There will be lively competition between LIFFE, the DTB and Matif, I am quite sure.
But as with CCP margin, it is important that we remember the reasons for the regulatory reforms in this area. As I have noted, one of the key differences between this crisis and the financial crisis has been the ability of the core banks to absorb a very severe financial market shock. We should not put that at risk by weakening the regulation of banks. If we want to increase the overall resilience of the system we cannot simply lower resilience in one area in order to strengthen it in another. Rather we need to look at other ways to reduce surges in the demand for liquidity and improve the supply of liquidity under stress. See BIS (2017) ‘Repo market functioning’ https://www.bis.org/publ/cgfs59.htm and BIS (209) ‘September stress in dollar repo markets: passing or structural?’ https://www.bis.org/publ/qtrpdf/r_qt1912v.htm 14  13  All speeches are available online at www.bankofengland.co.uk/news/speeches  13  Conclusion  The issues outlined above are neither an exhaustive nor a definitive list. There are other lessons about the financial system under stress that we will inevitably learn as this crisis progresses. Not all of these will be in the financial market and non-bank sectors. We will, as I have said inevitably learn more about the performance under stress of the banking capital regime and the usability of banks’ capital buffers. But the list, I think illustrates two important points.