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

of the monterrey conference next month. now, all of these developments have had - and will continue to have - enormous influence on the evolution of the financial environment, including bond markets internationally. monetary stability has brought a sustained decline in nominal government bond yields in industrial countries, and a narrowing of yield differentials, which was inconceivable during much of the earlier part of my working life. and fiscal prudence has brought not just a proportional, but in some countries an absolute, decline in the amount of private savings absorbed by government debt. that has left room for a rapid expansion and diversification of the corporate debt market to accommodate increasing demand, as the role of the private sector has increased. and the sovereign debt market, too, has diversified to include those emerging markets and transition countries that have succeeded in accessing the increasingly free international flow of capital. these are big, long - run, changes which, are for the most part likely to continue. so your job - as investors and investment managers, won't get any easier! i have the impression that the investing public is still coming to terms with the lower nominal returns that they can expect if we really are in a world of sustained low inflation. so they may be demanding quite a lot from you. it's true that in an environment of sustained monetary stability you might not see the very large and unpredictable swings in interest rates that i grew up with. i don't suggest that that interest rate risk will go away altogether - though if i could make just one comment on the current macro - economic situation you'll be discussing in a moment, it would be to caution you against placing too much weight on the steepness of the short - term interbank interest rate futures curve as an indicator of the likely course of official short - term interest rates - at least in the uk : our impression is that it includes quite a significant term premium. but even if interest rates are some degree less volatile, in a context of overall monetary stability, we certainly won't avoid sectoral imbalances such as we have seen over the past year or so ; nor can we exclude policy failures in individual countries, which can, as we saw in the asia crisis but happily not in the present case of argentina, have wider repercussions. so i suspect you will have your work cut out in pricing and managing credit risk in your necessarily more diversified bond portfolios. you have a difficult job. but the efficiency with which the market