have been factors behind the low structure of interest rates which are difficult to understand completely and raise questions about its durability. i have discussed some of them here today. in particular, i find it puzzling that there is little compensation for duration in the rate structure. while there are explanations for why interest rates may remain low for a considerable period of time, there is minimal compensation for the uncertainty as to whether or not this will actually occur. at the same time, equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation. again, there is little priced in for the risk that this may not turn out to be true. the ongoing improvement in the global economy, together with the fiscal stimulus in the us has caused some investors to question these views. if interest rates continue to rise without a similar rise in expectations about future earnings growth, one would expect to see a repricing of other assets, particularly equity markets. such a repricing does not necessarily mean a major derailing of the global recovery, indeed it is a consequence of the recovery, but it may have a dampening effect. at the same time, we need to be alert for the effect the rise in the interest rate structure has on financial market functioning. the recent spike in volatility is one example of this. in my view, that was a small example of what could happen following a larger and more sustained shift upwards in the rate structure. the recent episode was primarily confined to the retail market. the large institutional positions that are predicated on a continuation of the low volatility regime remain in place. that said, i have expected that volatility would move higher structurally in the past and this has turned out to be wrong. but i think there is a higher probability of being proven correct this time. 1 see kozlowski j, l veldkamp, v venkateswaran ( 2018 ), ‘ the tail that keeps the riskless rate low ’, available at, nber working paper no. 24362. 2 one may also want to think about the relatively low level of spreads in a number of fixed income markets, as my colleague christopher kent talked about earlier this week. in some markets ( but not all ), these spreads are close to pre - financial crisis levels. see kent c ( 2018 ), ‘ australian fixed income securities in a low rate world ’, address to the debt capital markets summit, sydney

prudential oversight is, to put it simply, the missing link between the different approaches of a central bank and a financial supervisor. a central bank significantly promotes financial stability by aiming at low inflation, sound payment systems and sustainable credit growth. supervisors exercise their responsibility for the stability of individual financial institutions by ensuring that they have adequate buffers to withstand shocks. the problem is that both responsibilities, although closely interrelated, have been poorly attuned. let me explain. 21. in the run - up to the crisis, most central banks warned against the risks to the financial system. but these warnings did not prove meaningful, as they were not effectively translated into mitigating action by supervisors. likewise, most supervisors believed that if individual institutions were sound, the financial system as a whole would be too. however, the financial crisis has shown that supervision of individual institutions is important, but not sufficient to preserve financial stability. 22. the message is clear : the supervision of the financial system as a whole should be strengthened to lower the chance and impact of future crises, and this requires central banks and supervisors to join forces. one important added value of macro - prudential oversight is that it looks at the interactions between financial institutions and their environment. a single bank, say, can exercise only a limited influence on housing prices. but, if many banks eased their credit standards for mortgage loans, housing prices could soar, possibly causing the housing market to overheat. a housing market crash can entail huge losses for the banking sector and the real economy. thus, by monitoring the interactions within the financial system, including the dynamics behind a build - up of imbalances, macro - prudential oversight can identify threats to financial stability. in light of these lessons, the eu political authorities have decided to establish a new european systemic risk board per 1 january 2011 to strengthen macro - prudential oversight in the eu. conclusion 23. ladies and gentlemen, let me come to an end. i have talked about one of the most sweeping crises the financial world has been confronted with since a long time. governments, supervisors and the financial sector worldwide have replied to this with ambitious measures and reforms. i am sure that many people, maybe even some among you, will question whether all these measures and initiatives will in the end improve the world? it is a simple and fair question, with no easy answer! and though i am no fortune teller, i firmly believe that these reforms will make the financial