rules are simply arbitraged away, for example using credit risk transfers to insurance subsidiaries, or asset securitisation sales to third party insurers, or credit insurance and derivatives sold by insurers. in the long run, both our financial stability and financial efficiency objectives could be undermined by this : financial stability if we find that these credit risk transfers are not robust, or that they result in potentially systemic strains in the insurance sector ; and financial efficiency through the extra costs of arbitrage processes. i emphasise that this is not a call for harmonisation of regulation or a blind assertion of the need for a completely level playing field, but simply a call to re - examine the rationale for differences in regulation. we may find that some differences are justified. for example, if we conclude that failures of insurance companies impose fewer systemic costs than bank failures, we might certainly choose to set our minimum insolvency tolerance at a different level. much of the detail of risk measurement and regulation must necessarily differ, for example because of the very different time horizons involved in life insurance compared with either banking or securities business or non - life insurance. but there is a body of common risks faced by banks and insurers on both their assets and liabilities – namely credit, market, and operational risks – as well as a body of distinct risks ( such as mortality risk for life insurance companies and on the banking side liquidity risk ) ; and to my mind this means that any very fundamental divergences in the basic frameworks do need careful consideration : for example, whether the trend toward risk based measures in banking needs to be mirrored in the non - life insurance regulation in europe. this is clearly not a small task but i would welcome it being scheduled for the future on the international agenda. the establishment in recent years of regulators like the fsa with responsibility in a single body for bank and insurance supervision will help to achieve progress in this area ; indeed the convergence of risks being taken by financial institutions of different origins is a central plank underlying the need, certainly in the uk, for an organisation like the fsa. conclusion i feel aware that throughout this address i seem to have repeatedly stressed the importance of advancing our analysis of systemic risk and at the same time the huge complexities involved in this task. having highlighted the difficulties, it is now conveniently time to hand over the podium to those who may have some of the answers! i'd like to end by referring back

measure and fluctuating factors such as correlations in risk profiles, and the mood and behaviour of the market once fragility at one institution becomes apparent. ( c ) consolidation the changing financial landscape complicates the task, and this brings me to the third point i wanted to highlight, namely consolidation. consolidation of financial institutions is a trend that is relevant to several different facets of systemic risk. first, does consolidation make banks more or less likely to fail? diversification is a solid protection against failure, but not all mergers and acquisitions are motivated by diversification – they may by contrast be designed to gain greater market share in an existing business and thereby do nothing to increase diversification. moreover, there is again the distinction between individual banks and the system – the system can be diversified by having lots of different specialised banks. this would not in all circumstances be a less robust system than one where individual banks have reasonably diversified portfolios which are all as a result vulnerable to common shocks, or one where a smaller number of large banks are all directly interconnected with each other. and finally, even if we were to conclude that consolidation makes banks safer in the long run, the short run effects could be very different as management tries to resolve inconsistencies in systems or clashes in cultures. secondly, there is the issue that consolidation is perhaps likely to make bank failure more damaging in its impact, although again this can only be judged case by case. and thirdly, since larger banks tend to be organisationally more complex, there is the question that resolving large bank failures can turn out to be an infinitely more complex task. i would stress that all this does not mean we think consolidation extends'too big to fail'status ; but it does mean that central banks and other authorities have to ensure that they are monitoring how consolidation is affecting risk and financial interlinkages. they should also think ahead and examine matters such as their own operational expertise, information flows with other bodies, legal processes and other procedures, in the event of a complex wind - down. ( d ) consistency the final point i want to highlight is the question of consistency of regulation between different types of financial intermediary. it makes no sense to introduce a rolls royce system of capital adequacy regulation for banks if we have not considered the ramifications for the financial system as a whole, in the light in particular of the very different capital frameworks which apply to insurance companies. we may find that our new