We are, again, watching this carefully, and it is why in 2010 we implemented the Building Societies Sourcebook to encourage appropriate risk management of lending and funding. The latter will be supported in future when we implement the net stable funding ratio which is the international standard to discourage reliance on short-term funding. We are also increasingly focussed on operational risks and the prudential implications of conduct risk, as I know are societies. I want to pick out one area of operational risk which is important, namely IT systems risk. One aspect of this is the cost and complexity of updating legacy IT systems in the face of growing demands on those systems from innovation in products. Cyber risk is also very high on our list of priorities. I recognise that not all societies have an internet presence, though I do know, of course, that you all use the internet. We will be seeking to ensure that cyber risk is properly tackled by societies as appropriate. In saying this, I am not seeking to pick out societies from other firms that we supervise, but we do think that these risks are in important respects common to all firms. Societies have generally been less affected than the large banks by conduct mis-selling costs, though not fully immune.
In the years leading up to the start of the crisis there was a dearth of prudential supervision, but I am quite prepared to acknowledge that there have been periods where the opposite has been true. My point here is that I don’t think the system of integrated regulation demonstrated the ability to deliver a stable equilibrium of conduct and prudential supervision. Third, there is something of an inbuilt tendency within integrated regulation to play down the active debate of issues where conduct and prudential regulators find themselves with potentially conflicting objectives. Of course, it can be said that the “twin peaks” approach that we are introducing could lead to endless debate and no outcomes. My own view is that that is not correct, and that the benefits of clarity in defining the objectives of the PRA and the new Conduct Authority, the FCA, will dominate any other consequences. There are several important reasons why reform of financial regulation will, in my view, be an important step forward, starting with establishing very clear public policy objectives for financial regulation to which we, as the regulators, are fully committed. For both banks and insurance companies, the PRA will have the objective of promoting the safety and soundness of firms. Consistent with this objective, it will focus on the potential harm that firms can cause to the stability of the financial system in the UK. We define a stable financial system as one that is resilient in providing the critical financial services that the economy needs.