andrew bailey : banknotes in circulation – still rising. what does this mean for the future of cash? keynote address by mr andrew bailey, executive director for banking services and chief cashier of the bank of england, to the banknote 2009 conference, washington dc, 6 december 2009. * * * i am grateful to helen allen, nikki brownlie, victoria cleland, nick davey, andrew dent, iain de weymarn, lee dobney, andrew hauser, matthew hunt, orla may, sally reid and andrew wardlow for their comments and assistance. it is a great pleasure to be the keynote speaker at banknote 2009. i want to use my time today to consider the implications of developments in banknote circulation for the future of cash. in particular, i am going to examine what i regard as the apparent paradox of banknotes, namely that the value of notes in circulation continues to rise, while the evidence we have suggests that the use of banknotes as a payment mechanism is declining gently, not i should say dramatically. i am going to illustrate this using our experience of bank of england banknotes. there are three parts to my remarks. i am going to begin by describing trends in banknote circulation and use. then i will consider the paradox in these trends. finally, i will draw out some key challenges that we face in managing the circulation of bank of england notes. let me say at the outset that my very clear objective in terms of bank of england notes is to maintain the integrity of our banknotes, and an important part of that is meeting the public demand. i am not trying to promote or kill our notes. the trends in banknote circulation and use i am going to talk about trends in banknote circulation in the context of the roles of money, as a medium of exchange ( payments ) and a store of value. chart 1 illustrates the pattern of the total value of bank of england notes in circulation over the last forty years. the striking thing is the acceleration of growth over the last fifteen years. this may come as something of a surprise to the “ cash is dead ” lobby. this chart suggests that nothing could be further from the truth. the total value of our circulation was around £15bn in the mid 1990s, while today it is around £45bn. as the chart also shows, this increase can for the most part be attributed to one denomination, the £20 note. but it is important to put this increase in notes in

and the global financial stability report. these efforts must now be redoubled. from the standpoint of central banks, recent events have underscored not only their role in monetary policy, but also their important function in the stability of the financial system. in this context, research on issues related with financial stability has been dramatically intensified. clearly, there are varied degrees of consensus regarding how to characterize a good financial policy framework, how to measure it, achieve it and preserve it, as well as its possible tradeoffs with monetary policy. this conference seeks to contribute the study and analysis of these topics, as well as cooperating in our management, as policymakers, of financial stability and associated macrofinancial risk. today, our work will focus on defining the concepts of financial stability and systemic risk, and on understanding the conceptual frameworks that support their evaluation and the links with and feedback from monetary policy. garry schinasi will open the day, introducing what we must understand by financial stability and examining the implications and challenges of understanding systemic risk. claudio borio will explore the operational aspects and the precautions we must take regarding the methodologies we use to measure systemic risk. dale gray will handle the third presentation, integrating the idea of financial risk – by using options – with macroeconomic models focusing on monetary policy analysis, then applying the tools to the particular case of chile based on his joint research with leonardo luna and jorge restrepo. johan molin will share with us the experience of the sveriges riksbank, which has led financial stability analysis since the problems it endured in the early 1990s. this afternoon, francis diebold will analyze, for the financial markets of the united states and four latin american economies, stock returns and volatilities to look for evidence of contagion and its characteristics. charles goodhart, dimitrios tsomocos and alexandros vardoulakis will present us the study of a heterogeneous agent model with a real - estate sector and financial fragility. later on, ethan cohen - cole and enrique martinez - garcia will present their research on the interaction of financial intermediation and banking system regulations and its effect on the optimal monetary policy response. tomorrow will begin with the presentation of jaime ruiz tagle and marcelo fuenzalida, who will examine, for the case of chile, the systemic risk of household debt. miguel segoviano will follow, with a review of systemic risk and banking stability from a macro