7  Chart 3 shows the implicit subsidy to the top 4 UK banks. At the height of the crisis it reached almost £ per year but has now shrunk dramatically. BIS central bankers’ speeches  5  The foundations are laid. The next stage of reform should build a system that serves households and businesses to its full potential. Such a system must be supported by pillars of diversity, trust and openness. Diverse Although banking remains the most important business by some margin, the increase in the relative price of bank-based intermediation has encouraged a shift towards market-based intermediation. Virtually all net credit growth since the crisis has been in bond rather than bank finance.8 Non-bank financial sector assets have grown by 130% over the past decade and are now equivalent to 120% of global GDP.9 Managed properly, that represents a welcome increase in diversity within the global financial system. If banking again comes under stress, these markets could act as a safety valve. For there to be diversity under adversity, the connection between banks and markets must be appropriately sized and durable. I noted how pre-crisis links meant that the collapse of subprime spilled over into the core of the system. The post-crisis connection must be wired differently, but not severed completely. Banks are needed to overcome the information asymmetries that prevent direct market access for smaller borrowers. But with the right standards an appropriate boundary between banking and securitisation can be drawn and financing capacity increased.
To protect against risks that banks think are low but are in fact not, a global definition of a simple leverage ratio has been agreed. In the UK, the Bank of England has just recommended powers to set a simple leverage ratio for domestically-regulated banks, building societies and investment firms. This will enhance the resilience of banks against risks that are hard to model.4 And it will ensure off-balance sheet exposures are properly capitalised. 3  Table 2 shows that the risk weighting of trading book assets has more than doubled. Despite accounting for only 5% of overall risk weighted assets, trading assets contributed more than one third of the overall increase in RWAs resulting from new regulatory requirements. Banks have responded by shrinking trading books. Chart 2 shows that across all advanced economy SIFIs, the share of such assets on bank balance sheets has almost halved. 4  Chart 2 shows that, for more than a decade before the crisis, average risk weights declined and, as they did so, banks increased leverage. This trend was central to the erosion of confidence in risk weightings. Since the crisis, average risk  BIS central bankers’ speeches  3  Retention and capital requirements for securitisations now have more closely aligned incentives between originators and investors. New requirements for money market funds have closed the gap between retail investors’ perceptions and their exposures. International standards are agreed to capture properly and limit off-balance sheet exposures.