i thought in closing that you might also be interested in a few observations on several issues which confront us today. these range from very high level issues such as leverage, to much more specific questions such as complex financial instruments. so firstly, leverage. leverage is not itself a threat to financial stability : indeed banking practice relies on leverage. but leverage can become a vulnerability once it ceases to be sustainable. and here we need to assess the global picture at several levels : not just that of the uk. firstly, we need to consider the sovereign level. both in the developed and emerging worlds, government debt levels have risen to unusual heights. second at the corporate level, where current levels of borrowing both to banks and through securities are high. and thirdly we need to consider household debt. you have only got to read the newspapers to know that in the uk the level of debt to income has risen significantly. in the usa it is even higher and other countries such as australia and holland, which are subject to a similar low interest rate environment, are seeing similar trends. the question is just what are the vulnerabilities? we are now at historically low rates of interest. servicing high levels of debt seems quite realistic. but a variety of things could get people to behave differently. to save more, or to repay debt. this could come if they felt that interest rates might rise and we did raise them modestly earlier this month. but it could also come for other reasons : a wish to save more for retirement for example. if a substantial change occurred it would, in the first instance, impact on monetary policy and our ability to meet our inflation targets. from a financial stability perspective too however we would clearly need to follow the evolution of any reactions and their consequences very closely. in the first analysis there is comfort from the improved risk management and supervisory processes that have been developed over the past decade. but we need vigilance in terms of the possible knock - on implications for the financial systems. moving to a more specific, and very topical, example i would like to mention complex financial instruments. we have all read alarmist stories. but alan greenspan often makes the point that one may over estimate some of the risks and under estimate the benefits. shocks such as the asian crisis, ltcm, 9 / 11 have been successfully absorbed by the financial system. the fact is that they have not triggered a systemic financial crisis and the instruments themselves contribute to flexibility and resilience in the system.

towards bank capitalisation and liquidity. monetary policy i have for some years openly queried the notion that it is enough to rely on monetary policy “ mopping up ” after the event. the “ mopping up ” doctrine came out of a view that monetary authorities could not spot bubbles but that policy could cushion the bursting of what turned out to be a bubble. the doctrine effectively assumes that, faced with the possibility of systemic stress, the monetary authority can always reduce its policy rate without taking risks with inflation. the current conjuncture tests that assumption. there is a nasty shock to demand from tightening credit conditions, here and abroad. and that may get worse rather than better in the coming months. so far, the financial system has faced a “ trading book ” problem ; but we cannot rule out a “ banking book ” problem caused by rising defaults. we face a race involving whether the deleveraging process can be sufficiently advanced for financial conditions to stabilise before macroeconomic slowdown, here and abroad, raises loan defaults and so brings a new dimension to the challenges in the banking sector and so to the supply of credit to the real economy. but, absolutely crucially, we also face a nasty shock to costs from rising commodity prices and sterling ’ s depreciation. that is going to push up uk inflation over the next few months, creating a risk of upward pressure on pay and higher inflation expectations. the mpc ’ s strategy to date has been clear : to offset part but not all of the shock to demand, consistent with an overriding determination to maintain medium - term inflation expectations anchored to the 2 % target. the path of rates will depend on judgments about the balance of those risks to the inflation outlook. and, in the context of my remarks today, that is different from a “ mopping up ” strategy involving simply reducing rates enough to offset estimates of the effect of the demand shock plus some insurance on top of that. central bank liquidity policy : the social contract if monetary policy has been constrained in alleviating the consequences of the financial turmoil, so too, for different reasons, has central bank liquidity policy in many centres. for over a century – coincident with the development of central banking – there has effectively been a social contract between the banking system and the authorities. on one side of the contract, commercial banks have been permitted to profit from maturity transformation, turning liquid savings into illiquid loans. commercial banks ’ ability to do this relies