For example, the cost of capital remains low and cash flows are high. Third, there is plenty of room for further gains in residential investment. Housing starts have been running at an annual pace of only about one million so far this year. This is low relative to both the rate of household formation that one would expect given underlying demographics and the rate of job formation. Moreover, continued improvement in mortgage  1  2  Jonathan McCarthy, Richard Peach, Paolo Pesenti and Joseph Tracy assisted in preparing these remarks. BIS central bankers’ speeches  credit availability should support the demand for new housing. Household credit worthiness is improving as the scars of the financial crisis heal, and underwriting standards may be relaxed somewhat in response to the excellent performance of recent mortgage vintages. Fourth, household finances generally are in good shape with debt service burdens at historically low levels. Nonetheless, household borrowing has been rising only very slowly, and the personal saving rate is somewhat elevated relative to what one would expect given the level of household net worth relative to income. This suggests that if households become more confident about their finances, consumer spending should grow at least as fast as income growth over the remainder of the year. But, I can’t be completely confident about this forecast. After all, several times during this expansion we have been fooled by sharp rises in the growth rate that appeared to presage a sustained pickup, but that subsequently proved fleeting.

Vulnerability - a quick survey Ensuring that companies, consumers and investors have confidence in their ability to effect transactions and access their funds, securities, and other financial assets is of the highest importance in times of crisis. Therefore it is clearly in the private and public interest to ensure that, in the event of any large-scale disruption, systemic consequences are minimized. However, minimizing systemic consequences requires knowing the major vulnerabilities of the financial system. With this knowledge the responsible parties in the private sector as well as in central banks and government can in principle take adequate precautions and remedies. Three sources of vulnerability can be identified. A first source of vulnerability is economic concentration among large and complex financial institutions. This may strike you as odd. But size is a potential source of vulnerability and industrial consolidation usually increases size. The financial industry has been experiencing numerous mergers and acquisitions. This has resulted in financial services offered by an increasingly small number of large and dominant players. Even if only one of these players were to stop functioning well the financial system as a whole might suffer. The second source of vulnerability is geographical clustering. Financial institutions are heavily clustered in a limited number of important international financial centers. Economic concentration and  2  BIS Review 55/2002  geographical clustering tend to add up. A huge number of firms, among them the industry’s giants, may be affected in one and the same location by one and the same disruptive event.