lowest parts of the bottom tail of the probability distributions. the evidence suggests that such events are not well captured by the normal distributions typically used in standard risk models. markets tend to behave in highly non - linear ways - moving within relatively narrow ranges for long periods, but then adjusting quite sharply. sometimes these adjustments can be related to clear external events - such as the world trade centre attack. but often there is no such trigger. the types of circumstances that generate these outcomes are not particularly well understood. this is, i believe, a central theme of the recent work of some of your founder members, and it is one with significant operational as well as theoretical implications. i noted a few minutes ago that the original basel accord had given rise to a number of distortions between economic and regulatory capital. this problem came to a head during the course of 1990s as banks increasingly engaged in so - called'regulatory arbitrage '. better credits, over - weighted by the accord, were progressively being securitised, leaving relatively poorer credits on the banks'balance sheets. and banks were getting little allowance for risk reductions achieved through portfolio diversification and the use of risk mitigation instruments. to address these issues, the basel committee has proposed a new accord which would allow firms to use externally or internally generated credit risk ratings to differentiate more precisely between different risks. there would also be a significant expansion in the recognition of collateral, credit derivatives and guarantees as means of reducing overall risks. these proposals are currently under discussion by central banks, regulators and market practitioners. given our financial stability responsibilities, the bank of england has been closely involved in this process. a team led by patricia jackson at the bank has been providing technical and policy support to the basel committee, and we hope to have an agreement in the course of next year. the new accord does not, however, go to the point of recognising var - type models for measuring credit risk on portfolios as whole. at present, these models are not judged to be sufficiently robust to form the basis of a regulatory regime. a central issue is the sheer lack of information. many types of loan have no publicly visible price, so the models lack a large and reliable data base. the behaviour of loans under different scenarios, and the correlations between different assets - both key inputs to any var model - have in many cases to be assumed rather than measured. and testing the ex post performance of the models is difficult. where credit instruments lack market prices,

stability. rather, it derives from the fact that some types of problem which initially affect only individual financial institutions may subsequently threaten the stability of the system as a whole. this contagion may not be fully in any individual firm's interests - or powers - to resolve, and it is this'gap in the market'which creates the need for public involvement via central banks. fortunately, banking crises do not occur every day of the week. but they do happen : an imf study counted 54 across the world between 1975 and 1997, of which 12 were in developed countries. such crises can have enormously harmful effects : recent bank of england analysis suggested that, over the past quarter century, total output losses during banking crises have averaged around 15 - 20 % of gdp in the countries in which they occurred. whilst the bank has responsibility for maintaining systemic stability, the day - to - day supervision of individual banks and other financial firms in the uk has been the responsibility of the financial services authority ( fsa ) since 1997. co - ordinating our system - wide perspective with the fsa's supervision of individual institutions and the treasury's legislative responsibilities is essential to the smooth functioning of the new arrangements. a memorandum of understanding, signed by the bank, the fsa and the treasury in october 1997, sets out our respective responsibilities, both in'normal'times, and in a crisis. and we work hard to foster these relationships, helped by the fact that i am a member of the fsa board and howard davies is a non - executive director of the bank. the three institutions also get together each month in the so - called'tripartite standing committee'to exchange information and discuss current threats to financial stability. i say once a month, but we meet more frequently than that when needed, as we have done for example over the past few weeks. what are some of those threats as i speak here today? we are, of course, still working our way through the implications of the dreadful events in the united states last month. uncertainty about the near - term outlook increased quite markedly following the attack, and this - together with the possibilities of supply - chain and market disruption, particularly in the us - contributed to some sharp adjustments in equity values. a number of sectors most closely affected by the terrorist attacks - in particular air travel and insurance - were badly hit. more recently, equities have rallied somewhat, suggesting that some of the earlier concerns may have been overdon