from accounting to improving legal certainty, and management of countries ’ external balance sheets. decision making about priorities is particularly challenging because we cannot be clear ex - ante how well the mitigation techniques will work, and we often need to rely on others to implement them. in addition we need to ask whether we are the right party to act. we also need to think about the relevance of our activities to our mandate – or “ must dos ”. in some areas, for example payment systems – one of our “ must dos ” – it is clear that we have a responsibility to reduce risks. in this case the questions we need to answer relate to the degree, methods and resource implications. but in other areas whether we should act is less clear cut. what particular contributions can we make and are there any areas where we can sensibly act alone? we need to ascertain areas where we can achieve results both domestically with hmt and fsa, and internationally with organisations such as the basel committee, the committee on payment and settlement systems and the financial stability forum. perhaps i can mention one area to which the challenge process suggests we should devote considerable resources – global institutional liquidity. as i have said before this is an area of potential vulnerability that has developed alongside the rapid globalisation of markets and of firms operating within them. i personally feel that it has been somewhat overshadowed in recent times by work in other areas such as capital adequacy. we feel that we can make a particular contribution here – both owing to our position in such a major global financial centre and because, in sterling at least, we are a potential provider of liquidity. so we justify devoting significant resources to the analysis of liquidity issues, and the development of potential risk reduction strategies for liquidity problems – nationally and in particular internationally. at the other extreme, whilst we feel strongly about the desirability of robust and widely applied accounting standards – and are prepared to express our views on the big picture aspects of this from time to time – we do not devote significant resource to analysis, or lobbying in this area. c ) preparation for a financial crisis and finally, tail event territory though it may be, we need to undertake preparation for financial crises. we need to think forward to being “ in - event ” where instability has actually been triggered, whether by a business failure of a firm or firms or by a terrorist or other disruptive event. we need to prepare now, in advance, to enhance predict

in january, the fsb published a consultation paper on its proposed methodology for identifying such firms in these sectors. based on the consultation results, the fsb will report to the g20 leaders summit in brisbane in november this year. we need to recognise, of course, that investment funds face – and pose – very different risks to banks. they typically manage pools of assets on behalf of investors who bear the ultimate investment risk. they can operate with some leverage, but this is generally subject to restrictions. asset managers act as agents to such funds, and make investment decisions on behalf of end investors that are consistent with their objectives and agreed mandates. however, despite their generally low - leverage, agency business model, investment funds can pose risks to financial stability. they often offer investors same or next - day redemptions, despite holding assets for which secondary market liquidity can be uncertain. in this way, like banks, they can face liquidity risks. a concern from a financial stability standpoint is that heavy asset sales necessary in times of stress to meet investor redemptions could disrupt systemically important asset markets, particularly where a fund ( or funds ) has a concentrated market position. there have, so far, been few historical examples of financial instability caused by funds experiencing distress. but we should be careful about drawing too much comfort from this. the scale of funds and the market environment are different now. for example, funds ’ investments in emerging market assets and high - yield bonds have quadrupled over the past five years. it is unclear what volume of redemptions could be met quickly without causing disorder in these markets. a year ago, the so called “ taper tantrum ” was a pointer to what could happen. and such risks may have become greater due to changes in the market. concerns have been raised by some in the industry that reforms to bank capital and liquidity regulation could, taken together, have potentially serious consequences for market liquidity. the regulatory community takes such concerns seriously and is looking closely at them. but we should not set as an objective a return to pre - crisis liquidity conditions. liquidity risk premia were likely too low before the crisis because liquidity risk was under - priced. and market - makers were permitted to fund their inventory with dangerously high levels of leverage, funded at very short maturities and, needless to say, the risk - weights attached to this sort of activity were very low. as a result, dealers were, it is true, able to carry