the bank and the fsa which i am confident we can build upon, enabling us to withstand the strain when the first pink elephant is sighted! the standing committee of the treasury, bank and fsa has met each month over the past couple of years. cross - membership of our respective bank and fsa boards is firmly established. howard and i meet regularly together. and most fundamentally our respective staff are in more or less continuous contact at working level - it is a culture that we must continue to work together to maintain. to be honest i have felt as closely in touch with significant developments, even in the banking sector, as i did before and perhaps better informed about developments in the financial system more widely. in part this is because, without day by day responsibility for banking supervision, particularly its consumer protection dimension, the bank has been able to refocus on and develop its wider oversight role, focusing particularly on strengthening the market infrastructure, intensifying our surveillance and crisis management, both nationally and internationally. i think perhaps you can get the flavour of our broader focus if you look at our half - yearly publication the financial stability review. the next edition is due out in a fortnight or so, and i ’ m sure that my office would be happy to make it available to you for a small commission - or you can download it free from our website. so, chairman, although howard took with him responsibility for banking supervision, and some 20 % of our staff, to the fsa, the bank ’ s essential concern with, and responsibility for, the stability of the financial system as a whole - and its role in promoting the efficiency and effectiveness of the financial sector, including the promotion of the city - remain much as they were. what has more clearly changed over the past few years is the external environment within which we pursue these tasks. and in my remaining remarks i should like to comment on three particular developments - the introduction of the euro, the impact of information technology, and continuing broader financial globalisation which have increasingly preoccupied the bank in our work in these areas. first, the euro. whether the uk is in or out of the euro, the bank has a keen interest in its success as a widely used trading and investment currency - for the contribution that can make to financial stability, to financial sector efficiency, and to financial activity here in the city. well before its introduction, the bank played an active role in coordinating the city ’ s technical preparation for the euro, and in encouraging the

pressures were at their highest. but this would have destroyed the market and damaged relations with investors, possibly beyond repair. another example is the existence of break clauses in derivatives contracts. these clauses enable either counterparty to a derivatives trade to call for cash settlement of the mark - to - market of their contract at a particular future date. the main reason for this “ break clause ” is that it reduces the contingent credit exposure. think in terms of a simple fixed - forfloating swap for 10 years. ( this transaction could be to convert a company ’ s fixed - rate bond issue into a floating - rate liability for example. ) the bank pays a fixed rate in exchange for receiving a floating rate ( say, libor ) from the corporate that issued the bond. if no break clause exists, the bank ’ s credit department would price the contingent credit exposure to the corporate over the full life of the contract. this could be very high : a substantial rise in shortterm interest rates would make the bank effectively owed a significant amount of money by the corporate. the bank needs to factor in that with this “ gain, ” there is an associated risk of default of the corporate. in reality, one can think of all these contingent credit exposures as the modern derivatives book ’ s “ loan portfolio ”. it is equivalent to a traditional loan book, except that it dynamically changes in line with market prices. the credit risk is obviously bigger when the creditworthiness of a company is lower and when the maturity is longer. the bank ’ s credit department will therefore calculate a credit spread that it will charge on top of the “ risk free ” swap level ( that would be charged between financial institutions that fully collateralize any mark - to - market swings ). for a longer - dated swap, this charge may be very after the “ current seller share ” had fallen below its minimum on two successive distribution dates – the company ’ s own investment in the vehicle had not been maintained at a high enough level. see also northern rock ’ s 2008 annual report and accounts p25 / 6. bis central bankers ’ speeches large. introducing a break clause allowing either counterparty to terminate the contract effectively shortens the maturity of the swap, since the bank ( or the company, in case it is owed money and the bank ’ s credit appears more shaky ) can demand payment at that time. in reality, most corporates do not expect such a break clause ever to be exercised. the concern would be that