To lend, to play their necessary role in enabling economic growth banks need to be healthy. So while it is right that we give banks time to transition to the end point of the new standards, that does not mean that we put off strengthening of capital and liquidity until the end of the process. We have needed in the UK to take action intended to restore banks’ capital positions to health. So that now they can move up to higher Basel III standards. On interconnectedness, we have agreed standards for the $ trillion of derivatives, including CDS, previously sold “over the counter”. This includes the requirements for trading to clear through “central counterparties”. So the risks in these contracts are transparent. So the risks are managed by ensuring that the parties to the contract back up their obligations to each other with collateral as the value of the contract changes. The US has implemented the new standards in law and is now implementing them in practice. In the EU, standards are expected to come into force in the next year or so. Between them, the US and EU account for 80% of this market. To be clear: Progress in this area has not been without setbacks. Although there has been now agreement on an international standard, implementation in the US and EU has differed in a number of key respects. At times these differences have threatened to balkanise what is now a global market.
And if it happens again we will again risk destabilising international financial crises. From the other side, in the absence of mutual trust, there will be increasing pressure to break up the global capital market. Regulators and supervisors who cannot trust the implementation of standards in other jurisdictions will defend stability in their own jurisdictions by raising barriers. Ring-fencing of capital and liquidity, non-recognition of foreign firms, restrictions on activities and extra territorial rules are just some examples of what can happen. Such action minimises the risk of international crises. But the cost is the rolling back of financial globalisation with less effective and efficient intermediation of global savings. So without mutual trust, the danger is either slipping back into weak regulation and supervision and regulatory arbitrage risking further crises or fragmentation of the international financial sector – a rolling back of financial globalisation that will damage global growth. Mutual trust will not be easily achieved. It will require more than hope and faith in our fellow man. Perhaps one day it can be founded on international law and treaty. Until then, however, it has to be built on the institutions and machinery established by those initial G20 meetings in Washington, London and Pittsburgh in 2008 and 2009. And in particular, on the work by the Financial Stability Board and the IMF. 6  BIS central bankers’ speeches  The Financial Stability Board has already established peer review mechanisms to assess implementation in its members.