This special feature analyses the indicator properties of macroeconomic variables and aggregated financial statements from the banking sector in providing early signals of distress in the banking sector. Identifying leading indicators of financial distress is important when assessing systemic risk within a broader financial stability analysis. An empirical model is estimated using data for 15 mature countries over the period 1980-2001. The analysis suggests that low economic activity, high domestic credit growth, rapid growth in property prices, as well as low profitability and low liquidity in the banking sector, have good properties as leading indicators of financial distress. Knowledge of the determinants of financial distress in the corporate sector can provide a useful foundation for analysing the degree of credit risk facing banks, and represents a key input for assessing risks and vulnerabilities to financial stability. This special feature examines the determinants of corporate failure in Italian, Spanish and French SMEs in order to shed light on whether the predictors of financial distress in these countries are the same or not. This is done by estimating models for each of these countries and a common model for the three. This allows an assessment of the differences in the determinants of financial distress and in the predictive ability of the two model set-ups. A market for collateralised debt obligations (CDOs) has evolved rapidly in Europe in recent years. Synthetically created CDOs based on credit default swaps have become a popular vehicle for transferring corporate related credit risk from the banking sector to other parts of the financial system. As with other new markets, CDOs contribute to financial efficiency, but also present new risks that central banks need to understand. From a financial stability viewpoint, concerns have been expressed about mispricing and inadequacies in risk management, even by the most sophisticated market players, as well as excessive reliance on rating agencies. Furthermore, public authorities face challenges in tracking credit risk around the financial system. Innovation and improvements in market functioning have helped to mitigate some of these concerns. In particular, the evolution of credit indices has fostered standardisation and secondary market activity. However, challenges for financial stability remain, requiring an ongoing monitoring of market developments by central banks. In November 2001, recommendations were published for the design and operation of securities settlement systems, drafted by a joint task force of the Committee on Payment and Settlement Systems (CPSS) of the central banks of the Group of Ten countries and the International Organisation of Securities Commissions (IOSCO). These 19 CPSS-IOSCO recommendations set out minimum standards that securities settlement systems should meet. They encompass the legal framework for securities settlement, risk management procedures, access, governance, efficiency, transparency and regulation and oversight, and they explicitly aim at "maintaining financial stability by strengthening the financial infrastructure". This Box discusses some of the recommendations that have a direct relation to financial stability. The rapid recovery and resumption of payment systems, in particular for systemically important payment systems (SIPS), is a key prerequisite for the resilience of the financial system to adverse shocks. In light of the new risks posed by the post 11 September environment, a number of efforts are currently under way worldwide to improve the recovery and resumption capabilities of payment systems. The objective is to provide guidance to system operators so that sufficiently robust and consistent levels of resilience are achieved across those systems. From a practical perspective, the evolution of the oversight policy for payment systems will consist of a further specification of Core Principle VII. This Principle states that "the system should ensure a high degree of security and operational reliability and should have contingency arrangements for timely completion of daily processing", but contains implementation guidelines that only cover business continuity arrangements in a rather generic way. Sources of risk in payment systems  The 2004 storm season in the eastern US was the most severe since 1886, when four hurricanes struck Texas. The four hurricanes that hit Florida in August and September 2004 caused serious damage to property and, even though a significant portion of the financial cost was borne by the state and by households, led to significant losses for the insurance sector. For multiple events such as successive hurricanes, precise estimates of losses are difficult to compute because they involve mapping specific damage to each storm. Preliminary estimates of the losses from the 2004 hurricane season range between USD 21.2 and USD 26.2 billion, thereby making it the most costly year to date for hurricane-related claims, eclipsing the previous record of USD 22 billion in 1992. This Box assesses the likely impact for the euro area insurance sector. Persistently low interest rates have left the life insurance sector with significant balance sheet vulnerabilities. In the past, when interest rates were higher than those prevailing towards the end of the 1990s and early 2000s, life insurance companies in the euro area sold savings products to households with guaranteed returns. Given the long-term nature of these policies and that they had fixed returns, strains on profits began to emerge. This was because the yields earned on the asset side became lower than the offered minimum guaranteed returns on the policies they had sold. The continuous declines in interest rate also raised the duration – or interest rate sensitivity – of life insurers’ liabilities. In other words, their balance sheets were left increasingly exposed to interest rate risk, as any change in long-term interest rates translated into a change in the net present value of their liability, just as bond prices are affected by interest rate changes. Against this background, this Box examines the ways in which the life insurance industry has attempted to tackle its balance sheet mismatches. The growth of credit derivatives markets over recent years has captured much attention. However, it is useful to recall that credit risk has been shared and transferred between counterparties since at least the 1970s. Loan guarantees and insurance preceded loan syndication, which emerged and became widespread in the 1970s. This was followed shortly afterwards by more traditional forms of securitisation. Credit derivatives emerged in the 1990s, and the market for these products has been growing at exponential rates.