grounded in such basic questions as : where does the firm make money ; are the revenue streams sustainable ; how well does the firm stand up to tests of stresses on its balance sheet ; does it generate cash flow to cover dividends ; is the leverage of the firm sustainable ; what are the risks from competition on premium income ; are there conduct risks which could pose a prudential threat? these are basic questions, but in another field, if the answers to such questions had prompted action in the past by banks, history would be different. what i have just described is judgemental supervision that must be forward - looking to the risks that may arise. this is crucial, and was not properly a part of the pre - crisis approach to supervision. let me give a few current examples of this for insurers. we are focused on the impact of very low interest rates staying with us for a protracted time, and when i say this i am offering no view whatsoever on the likely course of monetary policy. likewise, we want to know that the prudential position of firms also captures the possible impact of an unexpected upward shift in the slope of the yield curve, and again i am offering no view on monetary policy. the fpc in its most recent recommendations, from last month, has asked us, working with the fca and other areas of the bank, to provide an assessment to the fpc of the vulnerability of borrowers and financial institutions to sharp upward movements in long - term interest rates and credit spreads in the current low interest rate environment. there will be a report back to the fpc in september. this work will include insurers, and it will go along with the stress testing under way, which also – rightly – includes a “ rates stay low for long ” outlook too. another example of business model risk i would give comes from the impact of conduct issues. i am a very strong advocate of our new system, not least because it recognises that conduct and prudential supervision of insurers are different specialisms. my interest is in the possible prudential threats from any conduct issues. i am therefore keenly interested in martin wheatley ’ s assessment of these consequences and threats. finally, on business models, the work that we are doing to assess risks at an individual firm level and a sector level is complementary to the work that we expect firms to be undertaking. we believe that it is important that senior management of all insurers, big and

to fulfil the convergence criteria and to be allowed to join the euro, almost all of them became more lax as soon as they entered. in the first ten years of emu, they ran up deficits and debts, including during times of growth. as a result in 2008, when the crisis started, these countries had no more fiscal room and their public finances deteriorated substantially. member states ’ individual discipline has therefore been too weak, and collective discipline, which was nonetheless provided for in the stability and growth pact, was not applied in practice. i would like to recall the spirit of this pact. it was designed to be the fiscal pillar of monetary union. it was based on a peer - review mechanism. but, on the one hand, it was deliberately misinterpreted : whereas countries were required to maintain a fiscal balance over the cycle, without bis central bankers ’ speeches breaching the 3 % of gdp reference value for the annual public deficit, they interpreted this to mean : “ we can constantly run a 3 % deficit ”. and, on the other hand, the pact was not respected, as sanctions were not imposed on member states that breached these rules ( including france and germany around 2002 ). 2. the second cause of this crisis lies in the competitiveness gaps that had widened for a long time before the crisis. the economic rationale is easy to understand : when joining a currency area whose goal is to achieve an inflation rate of just below 2 %, changes in unit production costs must be in line with this central bank objective, modulo the productivity gains. in all countries that did not abide by this calculation and this discipline, year after year, there was a loss of competitiveness that ultimately proved very significant. as regards these budgetary slippages and competitiveness losses, i hasten to add that markets did not play their role. as soon as the euro was adopted, they ceased to differentiate between countries and sovereign yield spreads narrowed, even aligning themselves at the lowest levels, i. e. those of germany and france. for the first decade of emu, the single currency appeared to play a buffer role that in addition to protecting countries against monetary instability – which the euro successfully did and was its raison d ’ etre – also protected them against the economic reality. member states were labouring under the illusion that they could, without ever suffering the consequences, allow themselves to flout the rules for budgetary discipline or make no efforts to remain