Annex:  Chart 1: Probability density estimates  Chart 2: Probability density estimates  for UK GDP Growth  for UK RPI Whole sample (1857-2007) Golden Decade' (1998-2007)  Density 0.60  Whole sample (1857-2007) Golden Decade' (1998-2007)  Density 0.60  0.50  0.50  0.40  0.40  0.30  0.30  0.20  0.20  0.10  0.10  0.00 -15  -10  -5  0 5 10 Annual GDP Growth (%)  15  0.00 -40  -20  0 20 Annual RPI (%)  40  Chart 3: Probability density estimates  Chart 4: Probability density estimates  for UK Unemployment  for Annual Earnings Growth  Whole sample (1857-2007) Golden Decade' (1998-2007)  Whole sample (1857-2007) Golden Decade' (1998-2007)  Density 0.80  Density 0.80  0.70  0.70  0.60  0.60  0.50  0.50  0.40  0.40  0.30  0.30  0.20  0.20  0.10  0.10 0.00  0.00 -5  0  BIS Review 18/2009  5 10 15 Unemployment (%)  20  -40  -20  0  20  40  -0.10  Annual Earnings Growth (%)  11  Chart 5: Probability density estimates  Chart 6: Probability density estimates  for UK Base rate  for UK House Price Inflation  Whole sample (1857-2007) Golden Decade' (1998-2007)  Whole sample (1954-1997) Golden Decade' (1998-2007)  Density 0.40  Density 0.08  0.35  0.07  0.30  0.06  0.25  0.05  0.20  0.04  0.15  0.03  0.10  0.02  0.05  0.01  0.00 -5  0  5 10 Base rate (%)  15  20  0.00 -20  0 20 40 House Price Inflation (%)  60  -0.01  Chart 7: Probability density estimate for  Chart 8: Probability density estimate for  FTSE All-Share Index  UK 2.5% coupon consol yield Density  Whole sample (Jul 1700 - Nov 2008)  Whole sample (Jan 1693 - Nov 2008)  'Golden Decade' (Jun 97 - Jun 07)  0.24  'Golden Decade' (Jun 97 - Jun 07)  Density 0.10 0.09 0.08  0.20  0.07 0.16  0.06 0.05  0.12  (a) (b) (c) (d)  (c)(d) 0.08 (a)  (b)  0.04 0.03  (e)  0.02  0.04  0.01 0.00 -80  -60  -40  -20 0 20 40 Price return (%)  60  80  Sources: Global Financial Data and Bank calculations.

As after the previous two episodes of systemic failure, in October 1987 and August 1998, a third wave of technological transformation in the standards of risk management is now needed as a matter of priority. Firms themselves admit as much. That calls for a new agenda. I have outlined some elements of such an agenda, to address some of the failures exposed by the crisis. These measures involve a greater degree of engagement both between risk managers and senior management within firms, and between financial firms and the authorities. They would also involve much greater transparency to the wider world about risk metrics and accompanying management actions. These measures  14  Aikman, Alessandri, Eklund, Gai, Kapadia, Martin, Mora, Sterne and Willison (2008). 15  House of Commons Treasury Committee (2008). BIS Review 18/2009  9  would not prevent a next time –nor should they – but they might help make risk management roughly right. References Adrian, T, and Brunnermeier, M.K (2008), “CoVaR”, FRB of New York staff report no. 348. Aikman, D, Alessandri, P, Eklund, B, Gai, P, Kapadia, S, Martin, E, Mora, N, Sterne, G and Willison, M (2008), “Funding Liquidity Risk in a Quantitative Model of Systemic Stability” paper presented at the 12th Annual Conference of the Central Bank of Chile on Financial Stability, Monetary Policy and Central Banking (Santiago, 6-7 November 2008). Anderson H.C (1846), “The Emperor’s New Clothes”, Danish Fairy Legends and Tales (1846), Pickering. London.