regarding long term thinking, which might one day lead to an analogue to monetary policy, we are undertaking a research project. this is separate from our day to day activities where a set of organising principles can be used operationally to handle today ’ s issues. i ) research and development : creation of an analytical framework the research project is an attempt to devise an analytical framework as an analogue to that in monetary policy : to help clarify some of the differences i outlined earlier and to provide greater certainty and focus. as with the development of monetary frameworks, this will be a medium to longterm endeavour. this may sound overambitious. but even modest achievements towards it would enhance understanding of what financial stability oversight is about, and what our priorities should be in seeking to ensure it. and so it could assist our quest for clearer accountability and more transparent governance arrangements. this quest gets to issues such as how to define our financial stability objective, how to articulate indicators of financial stability, and how they relate to each other. it provides the possibility of calibrating systemic risk and developing tools that could potentially be deployed to reduce such risk, and will include scenario analysis and macro - stress testing. in reality, it is unlikely we will converge on a single model which captures systemic risk in its entirety. but by developing and calibrating a suite of models we hope to make some progress towards gauging fragilities and frictions in the financial system better – how likely they are to arise ; on what they depend ; and, ultimately, what pre - emptive mitigating action might be feasible. this could put financial stability analysis on a more similar analytical footing to monetary policy – albeit with a greater amount of uncertainty regarding eventual outcomes. with time we can review the outputs of this research work. we can then operationalise those that are relevant and robust to help decide our ongoing activities. in other words, the outputs of this r & d activity could become inputs to prioritising our day - to - day risk reduction activities. ii ) ongoing activities : organising principles in the meantime we have to address the real risks of today. how are priorities to be set? financial stability is an area where there are so many things we could do. so we need to have a set of organising principles to help us prioritise and focus. i ’ d like to describe the process we go through in addressing the difficult decisions – how much to do, and how far to go. one could

categorise sources of threat there are of course a number of ways one could cut the cake. credit exposure to emerging sovereign debtors for example can appear in the “ credit ” and “ international architecture ” boxes. iii ) activities now we can move to the rows. to use the matrix as a location device to focus our efforts, decide on deliverables and enhance our resource allocation, we need to create the “ boxes ” by considering the types of activity we could undertake to address each main source of threat – the rows. a ) assessment of threats firstly we need to evaluate threats to the system. we need a process of data collection and assessment to analyse information and market intelligence from multiple sources. this “ horizon scanning ” enables us to get early warning of how and where threats could appear. we cannot do all this without knowing how markets work. typically we obtain intelligence about what is going on from a number of sources, including a group of experienced staff who are operationally active in financial markets. we then evaluate and assess the threats from this intelligence. this needs people who are motivated to think through and identify new aspects of risk and threats, who can move with intellectual agility and flexibility between risks as they arise. this enables in turn high level management to judge the risk and allocate resources accordingly for risk reduction – as well as stopping work if threats no longer seem relevant. a key challenge here is distinguishing between slow burn issues ( such as a gradual shift towards more exotic financial instruments ) and the more immediate issues relating to, say, the prospect of a major market default. in each case it is important to understand the potential threats to financial stability : but the timescales and tools are different. the matrix helps to start the process. above all we have to clarify the types of threats we are looking for. an issue here is the risk of “ missing something ”. not acting on something seemingly minor may have significant consequences for financial stability and costs compared to the resource saved by ignoring it. so the stakes are high in getting this right – though we need here to be realistic as particularly in the early stages the significance of developments can be hard to read. b ) risk reduction secondly, risk reduction or mitigation. here we seek to make the financial system more resilient. this is the world of risk management, prudential standards, liquidity standards, resilience of payment systems etc. it can involve the promotion of codes and standards over a wide field ranging