been a stark reminder that borrowing short and lending long is an inherently risky business strategy. as the financial markets became disrupted, the liquidity risks of this strategy became painfully evident. intermediaries need to be sure that as the economy recovers, they aren ’ t also hit by the interest rate risk that often accompanies this sort of mismatch in asset and liability maturities. interest rate movements interest rates are difficult to forecast in the most settled or normal of times, and their path is especially uncertain in the current circumstances. short - term rates will rise at some point, but when, how quickly, and by how much will depend on the outlook for economic activity and inflation as the federal reserve pursues its objectives of maximum employment and stable prices. the historical record shows that short - term rates have moved in a variety of patterns in economic recoveries from recession : sometimes rates began to rise shortly after the economy turned around ; at other times it took a while for policy tightening to begin ; and in other instances, rates continued to decline even after the economic recovery took hold, as during the 1991 – 92 period and, to a much lesser extent, during the 2002 – 03 period. we are now just beginning to recover from the deepest recession since world war ii. most economists expect only moderate growth and a slow decline in the unemployment rate over the next few years, importantly because it will take time for banks to rebuild their capital and begin competing more vigorously for loan business again. clearly, we are in uncharted waters for monetary policy and the financial markets. when the federal reserve begins to raise short - term rates, the yield curve usually flattens – but not always. longer - term rates can respond in a multitude of ways, with important implications for financial intermediaries. recall that in 1994, long - term rates actually rose more than short - term rates for a time, steepening the yield curve and imposing substantial capital losses on market participants exposed to rising bond yields. by contrast, in the second half of 2004, long - term rates hardly rose, and in 2005 they actually declined when the federal reserve tightened monetary policy. in my view, the decline in long - term rates partly reflected a strong demand for dollar - denominated assets, especially from countries running current account surpluses, which were, in effect, greatly adding to the global pool of savings seeking higher returns. extremely low interest rate volatility probably also contributed to investors ’ willingness to extend duration. no one

you. they include a vast, critical mass of markets and financial services in commercial and investment banking, securities and derivatives activity, investment and fund management, insurance and commodities and so on, involving an extraordinary concentration of the strongest financial businesses from all around the world. to give just one example, uniquely among the major countries we have more banks which are incorporated abroad operating in the city than domestic banks, and over half of the total deposits of the uk banking system is denominated in foreign currencies, worth over £1 trillion - - that ’ s a one and twelve noughts - - notwithstanding the current strength of sterling. the particular strengths that have contributed to this massive concentration of international business are many and various. they include : the english language ; the convenient time zone ; the ready availability of the relevant trading and other financial skills as well as professional support services - - in law, accountancy, tax, property, communications and so on. they include effective infrastructure. and they include importantly, too, an adaptive regulatory framework which has in fact been remarkably successful in maintaining confidence in financial institutions and markets without stifling innovation and risk - taking. all of these factors - - and no doubt others - - help to explain why some 600, 000 people are estimated to be employed in finance and other business services in greater london - - a number which i believe is roughly equal to the total population of frankfurt. now you will have noticed that none of these factors has anything to do with the question of the national currency used either here in the uk or in continental europe. the main impact of the advent of the euro on financial activity, as i see it, is that it will encourage the development of broader and deeper and more liquid markets, in financial instruments of all kinds, where they are currently fragmented because they are denominated in the various individual national european currencies. the city of london thrives on liquid markets regardless of the currency - - and it will thrive on the euro, whether the uk is “ in ” or “ out ”. measured in these terms the introduction of the euro represents an opportunity for london rather than a threat. i have no doubt whatever that there will be a vigorous euro - euro market in london, come what may, just as there is a vigorous market in euro - dm or euro - francs as well as euro - $ and euro - yen at present. the reality is that the location of financial activity does not depend upon the local currency. it