42  15  All speeches are available online at www.bankofengland.co.uk/news/speeches  15  Of course, there would be many execution challenges, not least the risk of fragmentation across Digital Currency Areas.44 But by leveraging the medium of exchange role of a reserve currency, an SHC might smooth the transition that the IMFS needs. Conclusion 20 years ago, the theme of this symposium was “New Challenges for Monetary Policy”, and my predecessor, Mervyn King, was one of the speakers. His reflections were on the merits of inflation targeting and flexible exchange rates. The applications of his insights have contributed greatly to improved economic outcomes around in the world in the intervening years. But during that same period, the deficiencies of the IMFS have become increasingly potent. Even a passing acquaintance with monetary history suggests that this centre won’t hold. We need to recognise the short, medium and long term challenges this system creates for the institutional frameworks and conduct of monetary policy across the world. Given the experience of the past five years, I will close by adding urgency to Ben Bernanke’s challenge. Let’s end the malign neglect of the IMFS and build a system worthy of the diverse, multipolar global economy that is emerging. 44  For more discussion of this, see Brunnermeier, MK, James, H and Landau, JP (2019), ‘Digital currency areas’, VoxEU. 16  All speeches are available online at www.bankofengland.co.uk/news/speeches  16  Annex I.
12103 6 For further details please refer to https://www.bankofengland.co.uk/speech/2017/changing-risk-and-the-search-for-yield-on-solvency-2capital 7 Financial Stability Report, December 2016, Bank of England. 5  5  All speeches are available online at www.bankofengland.co.uk/speeches  5  insurers have used internal securitisations backed by their equity release mortgage portfolios in order to create a senior tranche with the required fixed cashflows. Let us dig a little deeper into the Matching Adjustment. In principle, the higher discount rate on liabilities is intended to reflect the component of the spread over risk-free rates that compensates other investors for risks to which the insurers are not exposed. In the case of bonds, this is the liquidity premium for the risk that they might have to sell into secondary bond markets at a time when credit spreads are wide. Annuity writers are not exposed to this risk and can therefore earn the liquidity premium provided they can bear the credit risk and hold the assets until maturity. Mechanically, however, the Matching Adjustment is not calculated by estimating directly the market premium for any risks to which insurers are not exposed. Rather it is calculated indirectly as a residual by subtracting from the yield on an asset (1) risk-free rates and (2) an estimate of the required premium for risks to which insurers are exposed. In the case of bonds, insurers are exposed to the credit risk that the issuer is unable 8  to pay interest or principal at maturity.