woods. but the darkest financial storm clouds have lifted a little since the fund meetings. the us congress finally approved more resources for the imf, the threat of a credit crunch extending to the industrial economies in the wake of ltcm receded, helped also by an easing of monetary policy in europe as well as in the united states. in asia, japan took more determined policy action to address the fragility of the banking system and to stimulate domestic demand ; the yen strengthened ; china and hong kong both remained admirably resolute ; and there have even been some encouraging signs of renewed capital inflows to some of the asian countries. the floating of the exchange rate in brazil last month inevitably increased concerns about emerging market instability, but it is encouraging that adverse effects on other markets have so far been limited. – 3 – there may be further particular setbacks, as far as the overall financial situation is concerned, but i think i can confidently say that if it doesn ’ t get any worse it is likely to get better. risk aversion is all very well for a time, but it doesn ’ t pay the rent! what we are now having to cope with are the economic consequences of the earlier financial disturbances. the inevitable counterpart of recession in much of the rest of the world is a sharp slowdown of net external demand – particularly for manufactures – in the industrial world. that has been reflected in growing weakness and falling business confidence in large parts of the manufacturing sector in both the united states and europe. the prospective growth in world economic activity has already roughly halved – from its trend rate of about 4 %. unless this fall in net external demand is offset by sustained domestic demand growth in the industrial countries – unless, in other words, the industrial economies collectively accommodate the necessary improvement in the external current account position of the emerging countries, through a deterioration in their own current account positions – the prospects for world economic activity would be dismal. happily, we start from a position of relatively low inflation throughout the industrial world and, faced with weakening external demand, we can afford to see higher offsetting domestic demand growth without jeopardising price stability. indeed we need to see higher domestic demand growth than we otherwise would if overall demand is not to fall short of underlying supply capacity, and we need it, too, to offset the effects of weak world prices and of lower exchange rates in many emerging market producers on our own domestic price level. these considerations largely explain the easing of

complicated, but in the real world there are benefits to innovation if risk management is effective. so, how do we square the responsibilities with the complexity? not by drowning in complexity, or by doing a canute and trying to tell it to go away. for boards it means having a certain level of understanding, not at the level of the maths of a copula. the key challenge for all of us is to be able to boil the complexity down to understand what are the key drivers – which judgements are likely to matter when bad things happen in the tail of the distribution of risks. this is a description of one of the hardest things in many walks of life – how to explain complex things in simple terms. in the bank of england, it is a challenge we face regularly in terms of bis central bankers ’ speeches explaining complex areas of public policy – it ’ s the same issue for our judgements on monetary policy. so, let me put forward a proposition for boards. it is the job of the executive to be able to explain in simple and transparent terms these complex matters to non - executives. in doing so, you should understand the uncertainty around judgements, in what circumstances they could be wrong, and how there can reasonably be different ways to measure things like liquidity. non - executives should not be left to find the answers for themselves, and they should not feel that they have to do so out of a lack of sufficient confidence in what they are being told. in other words, they should not be pointed towards the haystack with warm wishes for the search ahead. let me give an illustration of this in a highly topical area for banks and insurers, internal risk models. what does a board need to understand? try the following : • key elements of model design ; • significant assumptions and expert judgements ; • key sensitivities ; and • significant limitations and uncertainty in the model. to restate, the challenge is to reduce complexity to simplicity, so that board members feel that they understand : • where is the model expected to work well ; • in what circumstances is it likely to break down ; • is the overall model output credible ; • what “ moves the dial ” in terms of key assumptions or judgements ; and • are those assumptions and judgements reasonable? non - executives should be put in a position to possess a general understanding of the model and meet these expectations without detailed technical knowledge. that ’ s the job of the executive, to explain