For all of these reasons, I do not fully understand the concept of separation, whereas I do understand that of stopping speculation. At the same time as bank failures are continuing, banks have obtained an easing of their liquidity constraints under Basel III. Isn’t this a paradox? That's not what it’s about. We have always believed that a liquidity ratio was necessary – and, incidentally, we have applied our national rules for many years, which is not the case everywhere. But the draft agreement was finalised too quickly and we had to rework it. We need to strike the right balance between strict regulation and supporting the financing of the economy. But will the timetable be put back? Yes, I am in favour of putting it back a bit, if necessary, in order to make these major tradeoffs and to give banks more time for the implementation phase so that they can adapt to the new standards. Should banks carry less sovereign debt? Banks should facilitate the financing of the economy; from this point of view, they should not hold huge quantities of sovereign bonds, even if these constitute liquid assets that are precious in assets and liabilities management. But the excessive concentration of liquid assets on sovereign debt in the calculation of the liquidity ratio can run into difficulties – either when the sovereign has its rating substantially downgraded or, on the contrary, when the country has low levels of debt, such as Australia or Switzerland.
Indeed, in most circumstances, global capital markets are deep and liquid enough – having a sufficiently wide range of participants able to trade with each other, and with different risk appetites and different actual risk exposures – to absorb shocks. But history suggests that strains can appear at times. And as the system develops, we need to be alive to whether cracks might show up in new places or old weaknesses manifest themselves in new ways. 4  BIS Review 50/2005  The two challenges I have sketched out for today’s markets – the incidence, now and then, of structural short option positions amongst short-term traders; and of controls occasionally lagging behind innovations – have a common feature. They both entail understanding markets as something more than the positions of atomistic agents. In the first case, market participants have an interest in factoring into their risk management an assessment of whether a market has structurally imbalanced option (or option-like) positions. In the second case, market participants have an interest in working together to establish robust practices and infrastructure when a particular innovation takes off. Many risk managers are, of course, well seized of this. Let’s hope they are empowered too. As practitioners, you can, and should, play a part in buttressing the system – by continuing to innovate, and by factoring collective outcomes into your private calculus and risk management. BIS Review 50/2005  5