rate ; and second, the so - called fundamental spread, which is mapped from the credit rating of the borrower and used as a proxy for risk. one desirable effect of the matching adjustment is to insulate an insurer ’ s capital position from volatility in market prices. in its november financial stability report, the financial policy committee concluded that the matching adjustment reduces potential instability across the financial system. another effect is to bring forward part of the future yield on an insurer ’ s assets into current capital. a bigger matching adjustment therefore improves an insurer ’ s return on solvency ii capital. http : / / www. bankofengland. co. uk / publications / pages / fsr / 2016 / nov. aspx all speeches are available online at www. bankofengland. co. uk / speeches under solvency ii, matching adjustment assets need to be “ bonds or other assets with similar cash flow characteristics ”. they also need to have cash flows that are “ fixed and cannot be changed by the issuers of the assets or any third party ”. uk insurers can restructure assets through internal securitisations in order to produce senior tranches that meet the solvency ii tests for the matching adjustment. a material amount of illiquid direct investments by annuity writers have been transformed in this way. the matching adjustment benefit is capped at the level of bbb - rated assets. insurers are therefore targeting a matching adjustment ‘ sweet - spot ’ in order to maximise the return on solvency ii capital. market contacts have described to us an excess of funding for infrastructure projects near that sweet spot. given the potential impact on an insurer ’ s capital position, we are taking a close supervisory interest in this area. first, we will consider whether insurers are taking an appropriate matching adjustment in calculating their base balance sheets. put another way, the fundamental spread must fully reflect the risks the insurer has retained. restructured direct investments typically have neither market prices nor external ratings. an appropriate matching adjustment therefore depends on an insurer ’ s own valuations and internal ratings. we will verify that internal ratings capture the full range of risks. they should not have a persistent bias compared to those from regulated external credit assessment institutions ( ecais ). yesterday we published supervisory statement 3 / 17. it sets out how we will seek to obtain assurance on the exposures which present the greatest risk to our objectives. it also explains how

the starting point if it is to draw on the energies of the entire organisation. articulating it with great clarity throughout the organisation allows the collective alignment to the goals. this also avoids being diverted by distractions when we are confronted with destabilising times. it is also imperative when we are ambitious with bringing about change and transformation. knowing clearly the outcomes and the benefits it brings increases the potential of bringing diverse groups within a country and across countries to building the consensus on achieving a common goal. another aspect that needs to be mentioned is being paranoid about the worst that could happen. this is sometimes referred to as productive paranoia. central bankers need to excel as risk managers – knowing what could go wrong and prepare for the worst that is yet to come. in part it involves building the buffers to prepare for the unexpected events before they happen. when i am asked the question about how we are going to manage ‘ the lift off ’ – the normalisation of interest rate by the federal reserve in the united states – my response is that it is not what we will do now but what we have done before it happens that will see us through this period. it is not only the buffers that have been built but also the capability that has been developed that will better allow us to intermediate and thus absorb the shock. this will enable us to withstand the volatile financial flows that are already occurring in anticipation of this eventuality. sometimes there are also black swan events. these are defined as those developments that have a low probability of happening and that is difficult to predict and anticipate. being paranoid and building the resilience against such shocks will contain its damaging effects. therefore continuous rigour needs to be applied all the time, during the good times and the challenging times. vigilance, detecting developments that could signal danger, early recognition of risks are all important. also knowing how your risk profile changes over time will avoid one being taken by surprise. central banking is therefore not for the faint of heart. it not only demands the high levels of energy – not just the physical energy, but that of the emotional, spiritual and the mind. when tested to the limit, it is from these sources of energy from which the strength is derived. investing in these sources of energy will avoid its depletion. energy should not be taken for granted. then there is the courage that is needed. it is derived from your convictions and values that you hold, reinforced by your sense of purpose and what motiv