Condition 2: State Monotonicity:  is non-decreasing in  . Condition 3: Uniform Limit Dominance: There exist and such that (1) for all and and (2) there exists such that for all . Condition 4: Strict Laplacian State Monotonicity: There exists a unique . solving Condition 5: Finite Expectations of Signals: Condition 6: Continuity: and density . is well defined. is continuous with respect to signal  Morris and Shin use these to show be defined by Condition 4. Then for any Lemma 1: (Morris and Shin 2003) Let there exists such that for all , if strategy s survives iterated deletion of strictly dominated strategies, then = {Tight} for all and = {Risky} for all . Proof: See Morris and Shin (2003), Proposition 2.2. 26  BIS Review 168/2010  i.e. that agents play cut-off strategies, adopting strategy = {Tight} when in receipt of a , and adopting strategy = {Risky} when in receipt of a “high’ “low” signal . Condition 4 gives the threshold. signal  BIS Review 168/2010  27  Annex 2 International medium-term frequency cycles in real GDP and credit  28  BIS Review 168/2010  BIS Review 168/2010  29  30  BIS Review 168/2010  BIS Review 168/2010  31  32  BIS Review 168/2010  References Acharya, V.V. (2009), “A Theory of Systemic Risk and Design of Prudential Bank Regulation”,Journal of Financial Stability, Vol 5, 3, 224–255.
Surveillance and penalties  However successful we may be in introducing stronger standards, and incentivising people to follow them, attempted misconduct will still occur. So the Review also wants to consider whether more needs to be done to monitor for, and where it is found punish, misconduct. Firms should be at the frontline of these efforts. Underdeveloped monitoring systems and poor procedures for dealing with internal misconduct undoubtedly played a role in recent years. Though approaches to these issues have since improved, the Review is keen to identify examples of best practice, and ways in which the authorities can catalyse further progress. Questions we raise include the scope for stronger firm-level whistleblowing regimes, the role for electronic surveillance tools, penalties imposed by firms for staff breaching internal guidelines (and ways to publicise such cases), and the extent to which firms can punish poor behaviour by other firms by shifting business and reporting such behaviour to the authorities. Conclusion Let me come to a conclusion. We are slowly emerging from the worst economic crisis in living memory. Much has been done to strengthen the financial system since then: banks hold much more capital, they have more effective liquidity support, major progress has been made on ending Too Big To Fail on the global stage, and in the UK we have transformed the way that we regulate banks and how we set policy to deliver financial stability. But some of the benefits of these advances are being offset by a long tail of outrageous conduct cases.