And if it happens again we will again risk destabilising international financial crises. From the other side, in the absence of mutual trust, there will be increasing pressure to break up the global capital market. Regulators and supervisors who cannot trust the implementation of standards in other jurisdictions will defend stability in their own jurisdictions by raising barriers. Ring-fencing of capital and liquidity, non-recognition of foreign firms, restrictions on activities and extra territorial rules are just some examples of what can happen. Such action minimises the risk of international crises. But the cost is the rolling back of financial globalisation with less effective and efficient intermediation of global savings. So without mutual trust, the danger is either slipping back into weak regulation and supervision and regulatory arbitrage risking further crises or fragmentation of the international financial sector – a rolling back of financial globalisation that will damage global growth. Mutual trust will not be easily achieved. It will require more than hope and faith in our fellow man. Perhaps one day it can be founded on international law and treaty. Until then, however, it has to be built on the institutions and machinery established by those initial G20 meetings in Washington, London and Pittsburgh in 2008 and 2009. And in particular, on the work by the Financial Stability Board and the IMF. 6  BIS central bankers’ speeches  The Financial Stability Board has already established peer review mechanisms to assess implementation in its members.
Third, getting a handle on – and where necessary – regulating, the risks in the so called “shadow banking” system: the ecosystem of non-bank financial firms that perform a similar role in credit intermediation to that played by the banking sector. And fourth, and perhaps most important, making sure that no institution, no matter how large, how complex, how international in its activities or to put it simply, no matter how systemic, is “too big to be allowed to fail”. Because if financial institutions can make themselves too big to fail, if they can ensure that if and when they get into trouble the taxpayer will have no option but to bail them out if, as the economists put it, they can ensure that their profits and their pay are private but if it all goes wrong the losses are “socialised” then history teaches us that this is exactly what they will do. III. What has been achieved? So, in these four key areas, what has been achieved? The inputs have certainly been impressive. From a standing start in 2009 the Financial Stability Board has driven the regulatory reform programme. Under the FSB, around 25 groups have been set up to run around 15 major workstreams.