##tization of mortgages. however, as i will discuss, that government support can take many forms. the future of the gses : improving upon the existing model? how can we ensure that, in the future, mortgage securitization will be feasible even during highly stressed financial conditions? in the remainder of my remarks, i will consider some alternative approaches that focus largely, but not exclusively, on the potential role of the gses. one approach would be to try to return fannie and freddie to their pre - conservatorship status. in considering this possibility, we should remind ourselves of the problems that have surfaced with the traditional gse structure. first, the existing gse model involves an inherent conflict between the objectives of the companies'private shareholders and the objectives of public policy. for example, the gses were reluctant earlier this year to raise capital and to expand their operations, even though this would have helped financial and macroeconomic stability at a time of much - reduced mortgage availability. the gses'disinclination to support the mortgage market was motivated by the fact that raising additional capital would have diluted the values of the holdings of the existing private shareholders. second, during the past 15 years or so, the gses have operated with high leverage compared with other large financial institutions. this relative lack of capital ultimately proved their downfall. of course, to the extent that the debt of the gses is perceived to be guaranteed by the government, it is in the shareholders'interest for the companies to increase leverage whenever possible. third, it is also in the shareholders'interest for the gses to maximize the size of their portfolios to take advantage of the differential between the returns to mortgage - backed securities and the low gse funding costs arising from the perceived guarantee. however, as the federal reserve has argued for many years, the enormous gse portfolios pose risks to financial stability. as a result of the concerns i just outlined, the federal reserve board in the past has advocated a three - part approach to gse oversight : a strong regulator, capital standards adequate for the risks the gses assume, and an explicit and measurable public purpose for the gses'portfolios. 2 progress has been made in meeting some of these conditions. the housing and economic recovery act of 2008 established a strong regulator with the power to establish more - robust capital standards and with some authority over the size of gse portfolios. in particular, the law directs the new

##b ’ s marginal lending facility in euros. handling potential liquidity pressures faced by lcfis operating in multiple countries and currencies continues to be a focus of policy attention. third, the uk authorities are improving the procedures and information needed to manage systemwide risks should they crystallise. the bank, the fsa and hmt now conduct regular crisis management exercises to develop the coordination needed to handle operational disruptions and financial crises. market - wide testing of business continuity arrangements takes place annually. it involved some 70 firms and utilities in 2005 and another test is about to start. finally, the changing financial landscape has increased the importance of international crisis cooperation. an mou to develop such coordination in the eu amongst central banks, finance ministries, and regulators has been established and tested. we need to build on that to reach beyond europe and to test crisis management arrangements especially with us authorities. taken together, these measures should help reduce the likelihood of systemic instability in the uk. i hope that my remarks today help make clear that the private sector – through sound individual and collective risk management – has its part to play in lengthening those odds still further. recent work at the bank has been exploring this issue. see, for example, the analysis in wells, s ( 2002 ), uk interbank exposures : systemic risk implications, financial stability review, december, pages 175 - 182, and cifuentes, r, ferrucci, g and h s shin ( 2005 ), liquidity risk and contagion, bank of england working paper no. 264. see tucker, p ( 2004 ), managing the central bank ’ s balance sheet : where monetary policy meets financial stability, lecture to mark the fifteenth anniversary of lombard street research, 28 july.