deterioration in global demand for goods and services that occurred late in 2008 and early this year. there are some important features of this event that help us to understand both our own experiences in australia and those of other countries. historians will study this episode for years to come. they may find additional nuances, but one very clear trigger for the sharp collapse in demand was the heightening of stress in financial markets. a sequence of extraordinary events occurred in september and october last year. these included : • the us government taking over the two largest housing finance entities ; • the bankruptcy of one of the four remaining large us investment banks, which people had presumed was “ too big to fail ” ; • the us government taking over one of the world ’ s largest insurance companies ; and • in short order, pressure on systemically important institutions across the united states and europe. combined, this previously almost - unthinkable sequence resulted in a sharp increase in perceived systemic risk in financial markets and systems everywhere. stock prices fell sharply around the world. risk spreads on all sorts of debt instruments blew out, and capital markets for issuing ( or rolling over ) debt and equity essentially closed. it was the most turbulent period in international finance any current banker, economist, market trader or policy - maker has lived through or, we hope, ever will. unlike most previous financial crises, moreover, the news about this set of events reached people all over the world very quickly. they did not learn about it the way they once might have : sequentially, with varying lags, via delayed print media, word of mouth, high - brow publications and so on. instead, they learned about it simultaneously, via the 24 - hour news cycle, in every country, more or less in real time. not surprisingly, people everywhere suddenly became much more fearful of the future. in the face of this acute uncertainty, firms and households across the world did what you would expect. they acted in a precautionary way. they postponed discretionary purchases, shelved expansion plans and did what they could to consolidate their balance sheets. the result was a highly synchronised slump in demand especially for consumer durables and investment goods. production and consumption of more “ everyday ” non - durable goods and services did fall, but by much less than for those products that could easily be purchased tomorrow rather than today ( graph 1 ). graph 1 the nature of this slump helps us to understand both the relative performance of various national economies and the

interest rates were 3 percentage points higher. all speeches are available online at www. bankofengland. co. uk / speeches so there is no flashing warning light here telling us to pull over urgently. there is, perhaps, the light that reminds us the car is due for a service. developments in corporate credit, consumer credit and in the mortgage market could be signs of a more generalised pick - up in risk taking. and when risk taking increases, it must not be at the expense of the resilience of lenders to any future downturn in the economy. they must remain capable of serving in the bad times, as well as the good. our annual stress test provides the basis for checking that but, in this environment, more regular check - ups are needed too. that ’ s why ( as we said in the record of our march meeting ) we intend to “ re - consider the adequacy [ of capital levels ] in june, with a focus on the evolution of domestic risk appetite. ” we ’ ll keep standards up with the risks that are being taken. alongside that, we must also keep up with the third macro trend : a fundamental re - shaping of the system. in part due to regulatory efforts to level playing fields, banking is becoming more competitive. smaller banks are taking market share. in the past 12 months, smaller banks – that account less than a fifth of the outstanding stock of household lending – have delivered half the new lending to uk households ( see chart 5 ). their newfound importance in the supply of credit means that, even though they are individually small, their collective risk taking has increasing relevance to the whole economy. collectively at least, smaller banks must – like their bigger cousins – have the resilience to withstand economic bad times. that trend to greater competition should continue as payment services reforms and open banking come into play. perhaps the most notable change has been the shift from bank to market - based finance. this was covered in my speech ‘ market finance and financial stability : will the stretch cause a strain? ’ all speeches are available online at www. bankofengland. co. uk / speeches by allowing customers to connect to a range of banks and service providers through a single point, open banking could open to the door to the ‘ unbundling ’ of banking. deposits could become more sensitive to returns. the ability of large incumbent banks to pay less for deposits – a benefit worth £1bn each year – may come to an