stability oversight. so in concluding, let me try to draw together some of the principal themes in what i have been saying. i am naturally well aware that there are many positive features to today ’ s environment. but central bankers are sometimes accused of being pessimists and seeing the glass half empty. in our defence i suppose it is our job to think out what could go wrong and to be ready accordingly. the first message to leave you with is that we are concerned about financial stability because of the potential economic and social costs arising from financial instability. private markets will not always reflect these costs fully and prima facie there is a need for public oversight. second, the degree of complexity and interconnectedness has increased dramatically in recent years. here i would point to market liberalisation, technological advance and the development of a range of new instruments for transferring risk. third, market participants need to be aware that financial stability starts with them. integrity and sensible restraint are the bedrocks of stability. this requires heightened awareness that the leverage in the system as a whole, encouraged by the new risk transfer techniques, contains its own vulnerabilities. fourth, in response to the changing environment, the financial authorities have had to adapt their models and procedures for regulation and oversight. greater disclosure and transparency can be antidotes to the information deficits in an increasingly complex, and sometimes opaque, financial system. international cooperation is at a premium, both in delivering a consolidated view of globally active firms, and in seeking to clarify who is expected to do what when difficulties arise. they need to match this level of technical expertise with the private sector, and to contend with new or heightened risks in such areas as business continuity. fifth, as a central bank, we need to be as clear as we can about the nature of our contribution to the oversight process. at the core is our concern with the maintenance of liquidity, and our capacity to inject it when necessary. much of our financial stability work is aimed at identifying potential liquidity strains, and what responses are likely to be most effective. lastly, whilst the challenges for oversight may be daunting, progress in addressing these challenges is significant. but do not expect a zero risk environment - and do not demand it. fear of failure is the antidote for instability. it will go a long way to underpin the long term health of the financial system. governor lars heikensten “ the riksbank ’ s work on financial stability ” :

of economic downturn, then they may all react similarly to a given shock. this could itself amplify market movements and trigger liquidity difficulties, despite the best intentions. there is also the question of legal certainty. if counterparties doubt an institution ’ s strength or solvency, their behaviour may be influenced if they feel that complex and untested types of contract may not “ close out ”, particularly in adversity. such concerns lay behind the ltcm crisis in 1998. counterparties feared ltcm might be insolvent. they could sense a drain of liquidity from ltcm which might precipitate collapse. if collapse occurred, the vast array of complex contracts within ltcm might not close out. the dimensions of the exposures were considerable, and a disorderly run on ltcm, triggered in part by a lack of legal certainty, could well have provoked a serious liquidity situation. no surprise that there was a co - ordinated purchase by the main creditors to enforce an orderly wind down. a key lesson for financial stability oversight is the need to encourage ways of improving legal certainty. 7. implications of the new environment : risk and culture so much for the drivers of change - liberalisation ; technological advance and new products. but what about the implications for the financial markets and their oversight? the first implication is to highlight the need for examination and possible change in supervisory and regulatory frameworks. what made sense before, in terms of separate regulation for each silo of banking, insurance and securities might look different today. we have also certainly seen a move towards consolidated supervision. i will return to this area later. but second, oversight needs an understanding of a number of different soft issues : of culture and attitudes to risk which can affect behaviour. these can and do vary across the different areas of activity. the existence of new concentrations of risk might not matter if their new holders are fully aware of the risk implications, or if their likely behaviour could be anticipated by other financial participants or the public authorities. but new holders of such risk may not have the same understandings of what the risks consist of, as those who generate them. and accordingly they may behave in unexpected ways when shocks arise. for example in banking, confidence in the liquidity of the system and expected behaviour is underpinned by the presumption that, in the absence of a credit event, obligations will be honoured at a known time and date. this would typically beon the expiry