finding the right balance speech given by dave ramsden, deputy governor for markets and banking society of professional economists annual conference, london 28 september 2018 with thanks to amy lee and tom smith for their assistance in preparing these remarks and to staff across markets and bpfr and elsewhere in the bank for their many contributions, as well as to my colleagues on the mpc and among the governors for their helpful comments and suggestions. all speeches are available online at www. bankofengland. co. uk / speeches introduction it ’ s an honour to be invited to talk here for the society for professional economists ( spe ) today, and i ’ m very grateful to bloomberg for the opportunity to speak again in their fantastic hq. although i ’ ve spoken many times at the society ’ s events over the years either in my previous role at the treasury or in in my ongoing role as president of the spe this is the first time i ’ ve spoken at the society in its new guise as the society for professional economists and in my role as the bank of england ’ s deputy governor for markets and banking. this week is national inclusion week in the uk. and in that spirit i do think the spe ’ s new moniker, which kevin daly has championed, is more inclusive and speaks to a wider group of economists. that is borne out by the excellent turn - out today. at the same time we need to improve diversity in today ’ s economics profession, in central banking and in finance more generally. sustaining recent progress is a key priority for the bank of england as i know it is for the spe. people often ask me what my professional responsibilities in the bank are. the most formal description is contained in the bank ’ s senior managers and certification regime return. the sm & cr is a critical element of the post - crisis regime for accountability in the whole financial sector, ensuring there is a clear public line of sight running from the senior leadership through to every key function carried out by a financial institution. the sm & cr is an essential part of the soft infrastructure underpinning improved conduct and therefore fairer and more effective financial markets in the uk and globally. the sm & cr entry for me is long, and so i will just flag a few of my key responsibilities. what these boil down to is that among the governors i have operational responsibility for the bank of england ’ s balance sheet. it is the bank ’ s balance sheet that is going to be the focus of my talk today. the

rate ; and second, the so - called fundamental spread, which is mapped from the credit rating of the borrower and used as a proxy for risk. one desirable effect of the matching adjustment is to insulate an insurer ’ s capital position from volatility in market prices. in its november financial stability report, the financial policy committee concluded that the matching adjustment reduces potential instability across the financial system. another effect is to bring forward part of the future yield on an insurer ’ s assets into current capital. a bigger matching adjustment therefore improves an insurer ’ s return on solvency ii capital. http : / / www. bankofengland. co. uk / publications / pages / fsr / 2016 / nov. aspx all speeches are available online at www. bankofengland. co. uk / speeches under solvency ii, matching adjustment assets need to be “ bonds or other assets with similar cash flow characteristics ”. they also need to have cash flows that are “ fixed and cannot be changed by the issuers of the assets or any third party ”. uk insurers can restructure assets through internal securitisations in order to produce senior tranches that meet the solvency ii tests for the matching adjustment. a material amount of illiquid direct investments by annuity writers have been transformed in this way. the matching adjustment benefit is capped at the level of bbb - rated assets. insurers are therefore targeting a matching adjustment ‘ sweet - spot ’ in order to maximise the return on solvency ii capital. market contacts have described to us an excess of funding for infrastructure projects near that sweet spot. given the potential impact on an insurer ’ s capital position, we are taking a close supervisory interest in this area. first, we will consider whether insurers are taking an appropriate matching adjustment in calculating their base balance sheets. put another way, the fundamental spread must fully reflect the risks the insurer has retained. restructured direct investments typically have neither market prices nor external ratings. an appropriate matching adjustment therefore depends on an insurer ’ s own valuations and internal ratings. we will verify that internal ratings capture the full range of risks. they should not have a persistent bias compared to those from regulated external credit assessment institutions ( ecais ). yesterday we published supervisory statement 3 / 17. it sets out how we will seek to obtain assurance on the exposures which present the greatest risk to our objectives. it also explains how