One concrete result was the creation of the Financial Stability Forum, which meets semi-annually, bringing together central banks, finance ministries and regulators to discuss issues of common concern and to develop policies for controlling risks to the international financial system. The work broadly falls into three categories: crisis prevention, surveillance and crisis resolution. It is my intention today to concentrate on crisis prevention and crisis resolution and to discuss in some detail two issues currently under debate. The first relates, in the context of the revision of the Basel Accord, to the aggregate capital in the banking system and the optimal level of bank capital. The second concerns the international financial architecture and the respective roles of the private and official sector in dealing with liquidity crises. But before I turn to these I would like to say something about surveillance. This responsibility is shared in the UK between the Bank, FSA and HMT. Following the creation of FSA, the respective roles of the three parties were set out in a Memorandum of Understanding between them. While HMT is responsible for the structure of financial legislation and the FSA is responsible for the regulation of individual firms, the Bank is responsible for the stability of the financial system as whole. To this end, the Bank dedicates significant time and resources to tracking developments in the global economy and financial markets with a view to identifying potential threats to financial stability. Major developments are discussed each month in the Bank’s Financial Stability Committee.

This can’t be seen as an anomaly. If anything, it remains counterintuitive that net capital flows are still going “uphill” from emerging to developed economies. That means that some of the poorest citizens of the world are lending money to some of the richest, allowing those to finance their consumption. The same holds true for commodities prices. Commodities markets increasingly function like asset markets with the development of financial instruments based on commodities baskets. In fact, commodities have become an asset class in themselves which warrants special attention in terms of financial stability. On the other hand, there may be good reasons to think that “fundamentals”, such as strong growth in commodity intensive emerging economies countries underpin the current behavior of many commodity markets. Finally, financial volatility may be the product of some very specific features of the current environment. The conjunction of economic uncertainty, high risk aversion and ample liquidity worldwide is especially conducive to abrupt shifts in sentiment and portfolio allocations. Volatility becomes a problem when it is policy induced and, therefore, financial markets contribute to aggravating shocks instead of attenuating them. Then, durable instability settles in and creates potential threats for the real economy. We may be in such a situation today as there are doubts about the mutual consistency in economic strategies pursued by major economies. At the same time, some of the policies implemented to deal with volatility may cause additional damages and distortions in capital markets. I will address those two issues before turning briefly to longer term challenges.