Luci Ellis, the Head of Financial Stability Department at the Reserve Bank of Australia, yesterday told the Sydney Banking and Financial Stability Conference that banks would "always need to be regulated and supervised". Ellis told conference delegates that, "in a world where banks are central to financial stability, and society wants financial stability, policy will dictate that strong, effective and holistic prudential supervision of deposit-takers is essential.""We should remember that the policy measures that safeguard the liquidity of bank deposit liabilities, such as deposit insurance and liquidity provision by the central bank, can create incentives for banks to take those risks," Ellis said."Supervision goes far beyond ensuring that banks have enough capital, though that's important. Leverage matters, but how an entity behaves, given their leverage, matters more."Ellis said another implication for policy is that, if society has decided that a private entity can offer deposits, which requires central bank liquidity to work, then the central bank must indeed provide that liquidity. "Banks still need to take care of their own liquidity needs in normal and moderately stressed times. That is why prudential supervisors around the world have long imposed various kinds of requirements on banks' liquidity management," Ellis said. She said a third implication was that policymakers still needed to look at the whole system. The objective of financial stability policy is to protect the real economy, not look after banks for their own sake. Regulatory and supervisory measures that might seem superfluous to protecting the solvency of individual institutions might still be necessary for the stability of the system as a whole and of the economy.Related to the need to look at the whole system is that, in their efforts to protect the real economy, policymakers need to ensure that credit is still supplied to good borrowers even in bad times. A healthy and resilient banking sector can help achieve that; indeed, it would be difficult to manage it without one.The ongoing need for credit, and thus the value of a well-functioning creditor sector, is sometimes underappreciated, Ellis said. Especially since the crisis, the dangers of too much credit have become all too apparent. "Over-exuberant lending and borrowing can mean that some people are getting loans that they have little prospect of being able to repay even in good times," she said.Less well appreciated are the costs of having too little credit available, Ellis noted. "The point here is simply that in recognising that too much credit can be dangerous, we should not instead fall into the trap of thinking of all borrowing as illegitimate or somehow immoral. "Less credit isn't always and everywhere better. The low levels of credit available in economies in the regulated era of past decades are not the benchmark we should evaluating ourselves against now when we try to assess the risk in the system," she said.