Consequently, trading tends to occur infrequently and largely on a bilateral basis. Through the prism of these two asset classes, I hope to provide some preliminary answers to five key questions. First, what do we mean by liquidity and how can we measure it? Second, what does the available evidence show in terms of how liquidity has changed in recent years in the U.S. Treasury and corporate bond markets? Third, what factors could influence liquidity provision? Regulation might be one factor, but there also could be others. Fourth, what are the costs associated with shifts in liquidity and how do these costs compare to the benefits of a more resilient and robust financial system? Fifth, what future work is needed to better assess whether increased regulation has damaged liquidity provision and whether the resulting costs exceed the benefits of higher capital and liquidity standards in terms of financial stability? As always, what I have to say today represents my own views and not necessarily those of the Federal Open Market Committee (FOMC) or the Federal Reserve System. 1 What do we mean by liquidity and how can we measure it? I would define liquidity as the cost – both in expense and in time – of buying or selling an asset for cash.
4  BIS Review 56/2008  •  New capital regulations based on the Basel I model were implemented. In the new regulation there was a more appropriate relationship between loans granted (risks) and capital, instead of deposits and capital. •  Banco de España was empowered to issue accounting regulations for banks. It duly laid down new prudent accounting rules, in particular regarding loan classification and loan loss provisioning. Since then, the authority to establish accounting standards for banks has proven to be one of the most powerful tools at our disposal. •  Supervisory reporting was established. This is an essential element of supervision which allows for proper monitoring of the situation of banks. •  The Central Credit Register was introduced in the sixties, with all credit institutions required to report regularly to it. This database is exploited for supervisory purposes and will play an important role in Basel II supervision. It can also be used by the banks for credit risk management purposes. •  Since the seventies Spanish banking supervision has paid particular attention to obtaining "first-hand" on-site assessments of developments, to complement its continuous and close monitoring of every institution. •  The growth of the financial markets called for more transparency and better regulation of external auditing. A new law was passed making the external audit of the annual accounts compulsory for every company above a certain size, and for all financial institutions regardless of their size.