It wasn’t the first flash event we’ve seen in core financial markets, nor the most violent, but it was certainly the closest to home. Combined with the evidence from the US Treasury event of 2014, it suggests growing potential for flash events to occur in core markets, where we might previously have expected the depth of liquidity and breadth of participation to provide some protection against such stresses. So while recent events fortify my confidence in the ability of core financial markets to process identifiable risks, I equally expect flash moves in the self-same markets to continue to surprise us, even if I cannot hope to predict precisely when or in what instrument or currency pair the next significant flash event will occur. 6  Section 2 – The Bank of England’s corporate bond operations Of course, the referendum result prompted a lot more than an exchange rate reaction. An important consequence was the MPC’s re-evaluation of the likely prospects for the economy and decision in August to take a number of steps to ease monetary conditions. Some of these steps were familiar – reducing Bank Rate and initiating further gilt purchases. Some were more novel – providing term funding to banks in order to support Bank Rate pass-through, and purchasing corporate bonds. 7  The sterling corporate bond market is relatively small and concentrated in nature, with limited trading in the secondary market.
The way to do it is to set up a state-administered system to which all the banks pay a fee in relation to their risks, much like an ordinary insurance policy. Sure, the state still stands the risk in the event of a large failure. But in this system, it is duly compensated for the risk. And the financing is robust. If implemented widely, this solution will also make for a more level playing field between banks from different countries competing partly on the same markets. I therefore hope that the proposal will get more international attention than it has so far. There must be a strong negotiating position for the government even when financial stability is threatened The above set up is a good set up to be able to handle the average bank failure. But, again, in some situations a different regime may be needed. In particular, this may be the case when it comes to larger and more complex banks in a situation of markets turmoil, when there is a systemic threat to the financial system. In this situation, it may not be possible to immediately revoke the licence for a bank which is in serious violation of the supervisory regulations. The focus will need to be on maintaining the key operations in the financial system. To secure this, the bank may need to stay open, at least for a while.