First of all, was it true? Secondly, if it was, why? And thirdly, if indeed there was an arbitrage opportunity then how could we unlock its value? I remember feelings of frustration. Somehow we couldn’t quite see how to reconcile some of the essential differences, including regulatory and accounting distinctions. To say nothing of the language or jargon used in the two sectors. Well, the rapid growth of the derivatives industry during the late 1980s changed all that! All sorts of new instruments for exploiting arbitrage opportunities like the one I described came into being. The different aspects of risk were unpicked and recombined. Those developments depended partly on new information technology. And, together with securitisation the functional divide was crossed. That evolution provided colossal commercial opportunities and enhanced general economic value. I recall this because it’s a good example of how technical advances, some rocket science and market forces have changed the fortunes and capabilities of two great industries. And today, even though we don’t have full integration we certainly have greatly increased interdependence and linkages. Just take the involvement of the insurance industry in credit risk transfer as an example. And just as with a lot of interdependencies you get network effects with undoubted economic benefits on the one hand, but potential vulnerabilities on the other. Maybe I can start by making a few observations on the vulnerabilities - increased risk to firms or the overall financial system - that were less significant until the interconnections appeared.
Andrew Large: Convergence in insurance and banking - some financial stability issues Speech by Sir Andrew Large, Deputy Governor of the Bank of England, at a conference in the Mandarin Oriental Hotel, London, 12 June 2003. *  *  *  Introduction In getting together my remarks, I found myself wondering why you asked me, a central banker and former investment banker, to address this illustrious gathering of the insurance industry. What is it that makes central banks so interested in insurance? Central banks typically have two major preoccupations. Monetary stability and financial stability. Clearly those of us with an eye on the macro economic drivers which impact monetary stability cannot fail to have taken an interest in the volatility of equity markets. And that volatility has real implications for the life assurance world. Secondly, the way catastrophe and other cover can be extended in a world where terrorism is a fact of life has its own significance for the workings of the real economy. But it’s from the point of view of financial stability that I’d particularly like to develop some thoughts this morning. After all financial stability is about identifying and countering risks and threats which could ultimately impact confidence in the banking or wider financial system.