lawmakers and regulators. although risk management has become much more quantitative, considerable management judgement must be applied to the risk management process. frequent, small losses can generally be absorbed in the operating margin of the product or service. it is the low - probability, large losses that provide the greatest challenge. and, it is just such risks - - the ones that can severely damage, if not kill, an organization - - that too many enterprises do not formally take into consideration. when one looks at the extreme loss events for many types of operating risks, for example, executive frauds, it is easy to recognize that the normal bell - shaped probability distribution does not fit. rather, the extremely long - or fat - tailed distributions emphasize that risk management and internal control judgments must be applied. what is even more difficult, is that some exposures can better be classed as uncertainties than as risks. that is, patterns of losses, and risk drivers, are very hard to identify. terrorist attacks, technology breakthroughs, and other events that cannot be defined ahead of time often have significant implications for the loss exposures of corporations. indeed, recent events have demonstrated that the complexity and size of modern corporations create significant market risk exposures that give management and the board of directors little time to react after serious breaches in internal controls become known. reputation risk, especially in a trust business like banking, can lead to loss of liquidity, cancellation of major new contracts, and indictments, which bring the ultimate corporate loss - - failure of the firm. and as we have seen, the market's response can be harsh. risk management and disclosure the intended or unintended consequences of the opaqueness that comes with complexity raise serious issues for financial reporting and corporate governance. effective governance requires investors and creditors to hold firms accountable for their decisions. but they must first have the information necessary to understand the risks that the firm is bearing and those it has transferred to others. here again, enterprise risk management can provide a framework through which management and boards can convey appropriate information that will allow outsiders to understand the company's risk exposures and how the company limits and manages those risks. public disclosures by corporations need not follow a standard framework that is exactly the same for all. rather, we should insist that each entity disclose the information it believes its stakeholders need to evaluate its risk profile. each business line in a complex organization is unique, and - - to be most effective - - the specific disclosures of its risks

tightening of monetary policy, a crisis may ensue. in several countries the financial system has been on the verge of collapse during such a period of adjustment. this was the case in the us in the early 1980s and in the nordic countries around 1990. interest rates are the central banks ’ most “ direct ” tool for contributing to both monetary and financial stability. financial stability primarily contributes to price and exchange rate stability by facilitating the use of policy instruments for monetary stability purposes. unstable institutions and markets constrain the use of interest rates. tighter liquidity and higher interest rates may increase the uncertainty concerning the stability of the financial system. this suggests that situations may occur where there is a conflict between the two objectives. asset prices are an important link between monetary and financial stability. for example, a surge in property prices, with a risk of a subsequent fall, may threaten to undermine banks ’ collateral and increase loan losses. this can put financial stability at risk. a surge in asset prices without accompanying pressures on prices for goods and services raises a dilemma for central banks. there is no consensus on how to handle this dilemma. central banks have avoided targeting specific asset price levels. nevertheless, history provides some examples of when more emphasis might have been placed on asset price developments in the formulation of monetary policy. 1 structural changes in the financial sector have the strongest impact on monetary stability through the way it may alter the transmission mechanism of monetary policy. for example, if structural changes increase competition in the banking sector, banks may adjust their retail interest rates more rapidly in response to changes in central bank and money market rates. this means that monetary policy may influence savings and investment decisions more quickly. the four largest nordic countries have chosen different monetary policy regimes : • finland is part of the euro area ; • denmark is a member of erm ii ; • sveriges riksbank targets inflation ; • whereas norges bank focuses on long - term exchange rate stability. i want to emphasise that the objectives of monetary and financial stability can be achieved by different regimes, including the ones chosen by the nordic countries. denmark has for several years run a successful fixed exchange rate regime. denmark ’ s success must be seen in the light of a combination of factors. first, erm membership and denmark ’ s long - term commitment to a stable exchange rate have enhanced confidence in the current regime. second, fiscal policy has successfully supported the fixed exchange rate. for many other countries with less economic policy discipline, traditional fixed exchange rate regimes have