Howard Davies Director, LSE

1. With the Benefit of Hindsight… lessons from the credit crisis for banks, regulators and central banks Howard DaviesDirector, LSE Singapore 10th November 2008

2. Act One: Subprime

3. Case-Schiller Home Price Index 2000-2008 Source: Wikipedia

4. Mortgage Origination by Product (%) • Notes: • Total mortgage origination excludes seconds and home equity lines of credit • For relative growth versus 2001, 2007 annualized based on 9 months of date

5. Recent ABX BBB Price History Price Source: Markit Partners

6. Resecuritisation Capital Structure Containing Subprime Loans Subprime Mezzanine CDO Containing BBB Subprime Bonds 100% 100% 11% SUPER SENIOR AAA CUMULATIVE LOSSES 8.6% 40% AAA AA A BBB Equity 28% 20% 11% 11% 7% 7% 7% 0% 0%

8. Act Two: Liquidity

9. Sources: Bloomberg and Bank calculations

10. Act Three: Unravelling • Bear Stearns, Indymac, Wa mu • HBOS, RBS • Fortis, Dexia etc.

11. Act Four: Meltdown

12. Act Five: Pumping

13. The Credit Crisis: A Five-Act Tragedy Act One: Subprime Act Two: Liquidity Act Three: Unravelling Act Four: Meltdown Act Five: Pumping

14. EU Growth Rates: IMF Forecasts

15. European Commission Forecasts

16. Source: www.ft.com

21. Five Ways • Legitimacy – why Luxembourg and not China?

22. Global Committee Structure - A Regulator’s View G-7 (Gov’ts) IMF World Bank (Gov’ts) OECD (Gov’ts) WTO FATF (Money Laundering) IASB (Accounting IASC Financial Stability Forum IAASB (Audit) PIOB Monitoring Group Bank for International Settlements (Central Banks) G-10 (Central Banks) Basel (Banking) IOSCO (Securities) IAIS (Insurance) IFIAR (Audit) Source: Adapted with permission from Sloan and Fitzpatrick in Chapter 13, The Structure of International Market Regulation, in Financial Markets and Exchanges Law, Oxford University Press, March 2007 CGFS CPSS Joint Forum

23. Five Ways 2. Simpler, co-ordinated mechanisms which better reflect the shape of today’s markets

24. National Regulatory Structures 57 3 Other bank regulators 49 Central Bank 10 35 Central banks as banking regulator No Central Bank interest 7 54 Non-Central Bank 39 28 Central bank as one pillar 2 Source: How Countries Supervise their Banks, Insurers and Securities Markets 2007: Central Bank Publications

25. Five Ways 3. Speed: Basel 2 took a decade

26. Five Ways 4. Stronger links between macroeconomic surveillance and regulation • A new G (G12) • Standing group of Finance Ministers

27. Five Ways 5. Political leadership

28. Five ways to fix our Financial Architecture • Legitimacy – why Luxembourg and not China? • Simpler, co-ordinated mechanisms which better reflect the shape of today’s markets • Speed: Basel 2 took a decade • Stronger links between macroeconomic surveillance and regulation • Political leadership

29. And outflows from emerging markets

30. “ Bank failures are caused by depositors who don’t deposit enough money to cover the losses due to mismanagement”. Dan Quayle

31. With the Benefit of Hindsight… lessons from the credit crisis for banks, regulators and central banks Howard DaviesDirector, LSE Singapore 10th November 2008