This is  3  Due to these similarities, Goodfriend and King (1997) call these general equilibrium models with price rigidities the New Neoclassical Synthesis. 4  Significant effort to add financial frictions, particularly the financial accelerator that amplifies the cycle, was made by Bernanke et al. (1999). See also Christiano et al. (2007). Although these models do analyze the financial channel throughout the cycle, they do not originate a financial meltdown like the one observed last year. 5  For a detailed introduction, see Galí and Gertler (2007). BIS Review 112/2009  3  why the NKM will remain useful, while a different type of model will have to be found to address the issue of financial stability, together with extensions that are yet to be formalized. This brings me to the theory of finance. If there ever was one discipline that should have anticipated the vulnerabilities that were building up in financial markets, it was finance. Had the origin of the problem been inflationary, then the problem would have been macroeconomics, but the origin was financial. The origin of the crisis is closely related to financial innovation and the creation of instruments that should have diversified risks. Low interest rates, search for yields and a monetary policy that promised to rescue after severe falls in asset prices prompted the creation of a housing bubble. 6 Enormous efforts were made to price many extremely complex financial instruments, but even those academic efforts failed to build valuation models that realistically considered the instruments’ insolvency probabilities.

I’m pleased to report that, as outlined in our Consultation Response Document9 published a week ago, we received wide and consistent support for our proposals. We will be going forward with implementing ISO 20022, via the introduction of the Common Credit Message or CCM – which is central to message harmonization across the UK’s main interbank payment systems, as well as providing compatibility with the emerging international consensus. The Bank’s direct responsibility is for the UK’s high value payment system, CHAPS10, so we will be working closely with Pay.UK as we develop the CCM. But success will also require ongoing input from across the whole payment chain. It is important we implement this change effectively. Both to mitigate the risks that migration brings, but also to ensure we capture this opportunity. I want to emphasise that we must not think of the ISO 20022 implementation as one-off change, to be left untouched in the UK’s payment systems for years and allowed to become outdated. Furthermore, we must work hard to ensure that our implementation of ISO 20022 is not just inwardly focussed but internationally harmonised; international co-ordination will be key to unlocking the potential benefits for users of payment systems globally. Beyond the migration, there will need to be an ongoing evolution, development and enhancement of ISO 20022 and payments data in the UK. We must keep this in mind as we implement the standard; and indeed  9  The Consultation Paper is available at https://www.bankofengland.co.uk/-/media/boe/files/payments/rtgs-renewal-programme/iso20022/iso-20022-consultation-paper.pdf. The Consultation Response Document is at https://www.bankofengland.co.uk//media/boe/files/payments/rtgs-renewal-programme/iso-20022/iso-20022-consultation-response.pdf.