shares – so the prices of those assets fell. and in some markets for complex financial instruments, investors realised that perhaps they did not understand as much about the nature of the risks involved as they should. so not only did asset prices fall, but the markets in some of these instruments virtually closed. there were no buyers. this freezing of capital markets led to a chill in banking systems around the developed world. banks that had relied on selling packages of loans in securitised form found that they couldn ’ t sell them. investment vehicles that held securitised loans have found it difficult to finance their holdings by borrowing. faced with the possibility that they would have to finance these vehicles themselves, banks with spare cash have hoarded it and have become reluctant to lend to other banks beyond very short maturities. that has been evident in the spreads between interbank lending rates and central bank interest rates in the uk and equally in the euro area and united states. the bottom line is that banks that had financed themselves by borrowing from their peers, or by securitising and selling their loan assets, found that their funding dried up. in the united kingdom, northern rock was particularly exposed. it was able to borrow only at shorter and shorter maturities. the present financial crisis is of a most unusual nature in that it comes against a background of five years of strong growth of the world economy and a decade and more of remarkable economic stability at home. moreover, most banking and financial crises in the past – from the failure of overend and gurney in 1866, to the collapse of bcci in more recent times – were associated with bad loans and significant losses on assets. the remarkable fact about this crisis has been the relatively small size of the bad loans compared with the total assets of banks. the crisis has arisen instead from the way banks have managed their liabilities. what did the bank of england – as the central bank – do for the banking system? first, we did our routine work in the money markets of lending to the banking system against high quality collateral, such as government debt, and at bank rate set each month by the monetary policy committee. after some initial volatility, we achieved our primary objective in the money markets of bringing interest rates on overnight borrowing into line with bank rate. and over the past two months as a whole, overnight interest rates have, on average, been as close to bank rate in the uk as in the euro area and closer than in the us.

world commodity prices. keeping inflation close to the 2 % target is the biggest contribution the bank of england can make to economic stability generally. changes in bank rate could not prevent the profound change in the world economy that pushed down yields on low - risk financial assets and led investors to take on more risk. they cannot now prevent the re - pricing of that risk. and just as bank rate was not set to insulate the manufacturing sector from the trade deficit that resulted from the earlier change in the world economy, it will not be set now to insulate the banking system from the re - pricing of risk. but you can be sure that we will do whatever is necessary to keep inflation close to the 2 % target. tonight is the first time that the court of the bank of england, and the monetary policy committee, have gathered in northern ireland. so much has changed in the province since the troubles started and i first came to belfast to speak at queen ’ s university. given that we are the bank of england, it would be understandable if many in northern ireland were suspicious of our role. but i can assure you that we are most definitely the central bank of the whole of the united kingdom, including northern ireland. we pay great attention to events here, and, along with other members of the monetary policy committee, i visit regularly. we have a full time agency with a team who live and work in northern ireland and report back every month on what is happening in the local economy. at this momentous time in the history of northern ireland, i can assure you that the bank will continue to place great importance on its presence here. during my visits, i have discovered some extraordinarily successful companies, many set up during the troubles. as you continue to build the political success and economic prosperity of the new northern ireland, the bank of england will support you wholeheartedly through our efforts to provide a platform of economic stability.