Whatever our national or regional approaches, we have to be part of that global agenda. Capital and liquidity We’ve got our first landmark: the new Basel Capital Accord. The UK, the Bank of England, would have liked it to be more rigorous in some respects, but we most certainly think that it is an Accord worth having. It is a significant stiffening of the regime which has prevailed up to now – perhaps more in some respects than commentators immediately appreciated. It remedies problems not spotted in Basel I. Finding remedies for some of the problems with Basel II remains work in progress. The BCBS’s “fundamental review” of capital requirements for trading book positions will be one of the most important endeavours of 2011. Its main objective must be to tackle two things. The venal regulatory arbitrage that existed between the “banking book” and the “trading book”. And requiring capital to be held against the risks of violent swings in liquidity premia for instruments that are not resiliently liquid. That was how the drying up of liquidity in ABS markets undermined the (accounting) solvency of many trading books. Speaking in the USA, I should stress that it is tremendously important that the US, as well as Europe and Asia, do implement the Basel Accord faithfully and promptly. It is also important that the EU Directive implementing Basel leaves flexibility for supervisors to apply supplementary requirements based on the condition of individual institutions and, separately, taking into account cyclical circumstances.
Too Big to Fail: resolution regimes This wasn’t a crisis that revolved in every single degree around institutions that were Too Big Too Fail but, my goodness, they were at the heart of it. And it is intolerable for our societies, it is intolerable for capitalism, that we should continue to have institutions that are too big to fail. The Financial Stability Board will, therefore, be recommending to the G20 a package on this. It will include greater loss absorbency for the largest and most complex firms whose distress would inevitably spillover into the global system – probably in a way that can, in degree, be implemented in different ways in different countries and contexts, subject to a meaningful process of peer review to avoid free riding. But absolutely central to this is resolution regimes. Too many countries do not even have the most elementary resolution regime for their national commercial banking institutions. Perhaps partly for that reason, many people, when they talk about resolution, slip after about 15 seconds into talking about enhanced supervision and early intervention. To be clear, resolution is about when everything else has failed. It is about when early intervention and higher capital requirements, better risk management and more resilient capital markets let us down, and we are in “the last chance saloon”. The distressed institution is no longer viable, and officials are presenting our political leaders with a ghastly choice between chaos from straight liquidation and, alternatively, taxpayer support to prevent the system imploding.