Despite changes in banking over the last few years, many of which already have been discussed today, credit risk remains the predominant risk for most banks. However, credit risk clearly extends beyond conventional credit products such as loans and letters of credit. Today, banks are taking on credit risk in the form of margin lending and transactions in the over-thecounter derivatives markets that expose them to large amounts of counterparty risk and can be difficult to measure. They also may be engaged in taking on credit risk in its more subtle forms. The short-term credit risks in futures brokerage, where the clearing broker stands between the customer and the exchange, or the often underestimated, but substantial, credit  1  BIS Review 32/1999  risks that arise in settling foreign exchange contracts, are examples. Credit risk also may exist in more complicated, less conventional forms, such as credit derivatives or tranches of securitized assets. Market risk also remains prominent. The upheavals in both global fixed income and equities markets over the last year led to a great deal of volatility in spreads and asset prices and caused large swings in bank profitability. These events demonstrate that the world doesn’t necessarily work the way we thought it did, that there are correlations between markets that we had previously thought were unrelated. As banks continue to expand their global trading operations, the need to understand the relationships between markets increases. This challenge is amplified by technological advances and financial product innovations that contribute to ever-more complex market instruments.

Pain, N., I. Koske and M. Sollie (2006), “Globalisation and inflation in the OECD economies”, OECD Economics Department Working Paper No 52, Pula, G. and F. Skudelny (2007), “The impact of rising imports from low-cost countries on euro area prices and labour markets – some preliminary findings”, paper presented at the ECB conference on “Globalisation and the macroeconomy”, July. Reichlin, L. (2006), Panel remarks at the Thirteenth International Conference “Financial Markets and the Real Economy in a Low Interest Rate Environment” Bank of Japan, Tokyo. Rajan, R. (2005), “Has Financial Development Made the World Riskier?” NBER Working Paper No. 11728. Rajan, R. (2006), “Monetary Policy and Incentives”, in Fernández de Lis, S. and Restoy, F., Central Banks in the 21st Century, Proceedings of an international conference sponsored by the Banco de España; Madrid, Banco de España. Rogoff, K. (2004), “Globalization and Global Disinflation”, International Monetary Fund, paper prepared for the Federal Reserve Bank of Kansas City conference on “Monetary Policy and Uncertainty: Adapting to a Changing Economy”, Jackson Hole, Wyoming, 28-30 August 2003. Rogoff, K. (2006), “Impact of Globalization on Monetary Policy”, Harvard University, paper prepared for the Federal Reserve Bank of Kansas City conference on “The New Economic Geography: Effects and Policy Implications” Jackson Hole, Wyoming, 24-26 August. Woodford, M. (2007), “Globalization and Monetary Control”, Colombia University (prepared for the NBER conference on International Dimensions of Monetary Policy, Barcelona, Spain, June 11-13, 2007).