changes in trading volumes and to cope with periods of strain. and the greater integration of capital markets means that if a major problem does arise it is more likely to spread quickly across borders. so as highlighted by a number of academics and authorities, 1 the flip side to increased resilience of the financial system to small and medium - sized shocks may be a greater vulnerability to less frequent but potentially larger financial crises. benign economic and financial conditions in recent years have kept credit losses at low levels. combined with buoyant returns from capital market activity, the profitability of major financial institutions has been strong. and capital levels are high. but as highlighted in financial stability reports by the bank of england and others, this benign environment has encouraged an increase in risk - taking and a “ search for yield ” which has lowered the compensation for bearing credit risk and market risk to very low levels. the vulnerability of the system as a whole to an abrupt change in conditions has consequently increased. against this background, i would like to focus my comments today on some of the implications for the management and reduction of risks to the financial system as a whole. more specifically, how can the public policy goal of promoting systemic financial stability be best achieved? i will not provide a fully comprehensive answer to this question but will touch briefly on four aspects ; improving the assessment of vulnerabilities that might threaten stability ; developing appropriate buffers for capital financial system risks in the uk – issues and www. bankofengland. co. uk / publications / speeches / 2006 / speech280. pdf challenges ( john gieve ) ( july 2006 ) and liquidity within the financial system that take due account of the changing nature of risks ; strengthening the core market infrastructure ; and lowering legal uncertainty. systemic stress - testing as financial markets evolve and new vulnerabilities are exposed, it becomes increasingly important that both market participants and the public authorities improve their understanding and assessment of threats to financial stability, and take steps, where appropriate, to contain and lower them. the bank of england has been active in the development of models to identify and assess potential sources of major vulnerability to the uk financial system 2 and is, with the financial services authority, engaged in a dialogue with practitioners, both to understand better current approaches to measuring risks under stressed conditions and to encourage improvements and the sharing of best practice in stress testing techniques. recent distress in the us sub - prime lending market, and the collapse of the hedge fund, amaranth, have exposed

and economic stability. the single monetary policy, based upon efficient instruments and payment and security settlement systems, has been conducted in a credible manner and has successfully maintained price stability for about 300 million people. the overall economic outlook for the euro area is quite favourable with good chances for a sustainable and non - inflationary growth and more employment. compared with other parts of the world, inflation rates are relatively low, budgets increasingly consolidated and structural reforms under way. financial markets within the euro area are in full process of dynamic restructuring - we can already observe a highly liquid and fully integrated money market and deeper and more efficient capital markets. therefore i am fully convinced that after its successful launch, the euro has all the potential for a strong, competitive and well - accepted currency in international financial markets.