It is stating the obvious to say that over the last 18 months, and even more so the last four, the world financial system – and particularly but not exclusively the world banking system – has suffered a crisis as bad as any since the stock market crashes of 1929 and the various banking crises that followed. As a result, banking systems in many countries are suffering from an impaired ability to play their vital role in credit extension to the real economy and a process of deleveraging threatens severe adverse effects on real economic prospects. The crisis therefore presents the financial authorities – central banks, regulators and finance ministries – with two challenges:

• The first and most urgent is to design short-term policies so as to at least limit the adverse impact of deleveraging and deflation on the real economy. We cannot make that impact nil, but we do know how to avoid the policy mistakes which turned the initial problems of 1929-30 into the Great Depression. Fiscal and monetary policies need to be carefully designed, and – as we approach a zero interest rate and consider quantitative easing options – need to be increasingly coordinated. And there are a wide range of policies which can be taken to free up financial markets – measures which Ben Bernanke last week labeled “Credit Easing” – funding guarantees, liquidity provision, tail risk insurance, direct central bank purchases of assets, and regulatory approaches to capital regulation which avoid unnecessary pro cyclicality in capital adequacy requirements. The measures announced by the Chancellor of Exchequer on Monday were designed as an integrated package, which will have a significant impact. And if more measures are acquired they can and will be taken.

• It is not, however, on this challenge of short-term economic management – where the lead must be with the fiscal and monetary authorities – that I’m going to talk tonight. But instead on the second challenge: how to design the future regulation and supervision of financial services so that we significantly reduce the probability and severity of future financial crises? Last September, when I took over as Chairman of the FSA, the Chancellor asked me to conduct a review of our regulation and supervision of the banking system, and I will deliver that Review in March, alongside the publication of a comprehensive FSA Discussion Paper. That paper will set out the changes the FSA has already made, those where we have proposals in principle but need to consult on details, and those where we have defined our objectives but now need to play our role in achieving international agreement.

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