sir andrew large : financial stability - maintaining confidence in a complex world speech by sir andrew large, deputy governor of the bank of england, at the city of london central banking conference, national liberal club, london, 17 november 2003. * * * i am often asked what we mean by financial stability and what the bank, or “ the authorities ” generally, are doing to maintain it. let me start with the observation that maintaining financial stability is different in a number of important respects from conducting monetary policy. there is no quantified target ; no foolproof way of deciding where to look for potential threats ; and no fixed timetable for policy decisions. financial stability is altogether less tangible and more elusive. but it is nevertheless extremely important - as the substantial costs associated with financial instability demonstrate. the bank of england has had an interest in financial stability for a very long time. but for most of that time its interest was implicit rather than explicit. in the more formal structure put in place in 1997, after the bank was granted operational independence on monetary policy, our financial stability role was laid down in a published memorandum of understanding between hm treasury, the bank and the fsa. today i would like to make a few observations on some of the issues at the top of our current agenda. financial crises are nothing new. indeed the bank has been handling them since the eighteenth century. some are signalled well in advance. others are more of a surprise, such as ltcm. what is certain is that financial crises can be very costly. for sovereign debt crises they can run to a loss of 15 - 25 % of gdp. for chile in the early 1980 ’ s they were closer to 40 %. so the art of minimising the emergence of crises, and mitigating their effects when they do nevertheless occur, are matters of public importance. for us in london the challenge is particularly real. our focus must clearly be on the stability of the uk financial system. but markets have globalised ; and they have also become more complex. with london a pre - eminent international financial centre, contagion from just about any significant financial crisis anywhere in the world has the potential to threaten financial stability here. in a broad sense, i like to think of financial stability in terms of maintaining confidence in the financial system. threats to that stability can come from shocks of one sort or another. these can spread through contagion, so that liquidity or the honouring of contracts become questioned. and symptoms of financial

the implementation of such changes over a short period of time raises some concerns ; and while considerable progress has been made in addressing the 42 directives under the fsap umbrella there is still much to be done. over the next few years we need to implement fourteen significant eu legislative measures, including for example the international accounting standards regulation - the importance of which i highlighted earlier, as well as the new capital adequacy regime. we need to achieve so much so quickly, that there is a danger that people will take their eye off the ball. this is relevant not just to the authorities but also the firms and institutions who need to introduce new systems and new procedures. all this needs to take place in parallel in the course of the normal business day. and in doing so we need to ensure that the changes which are being introduced to enhance the eu financial sector do not themselves threaten the stability of that system. i have this morning traversed a broad territory. firstly, what is financial stability? secondly, how do we at the bank of england fulfil our role to maintain the stability of the financial system? and finally, highlighting some of the key areas that are currently active on our agenda. as you see, we have to extract from the global canvas the issues that pose the greatest threats and to then focus on them. international cooperation is the key to this, and events such as today ’ s conference with its range of distinguished speakers and attendees from across the globe can only help this process.