“An effective system of banking supervision is as important as the banking system itself. For without it there would be no confidence on which sound banking depends—from the confidence of the individual depositor that his money is safe, to confidence in Britain as one of the foremost financial centres in the world, indicating the concerns at the highest level over the potentially far- reaching effects of a weak supervision system.”2

Effective bank supervision and investor confidence are inextricably linked. If investors are to have confidence in UK banks, then its banks must be subject to an effective supervisory and regulatory regime. If that regime is to be successful, and banks are to be safe, then investors need to have confidence. Banks are particularly prone to “systemic risk” caused by bank runs. This susceptibility is largely because customers are able to withdraw their funds at very short notice. Banking is an unusual business in that a well-managed and profitable bank can suddenly find itself in difficulties because of its financial structure and, in particular, the nature of its assets and liabilities. Banks’ assets, in the form of loans, are largely illiquid, while their liabilities, consisting mainly of deposits, are highly liquid. As