Initially this appeared to be related to the impact of the global slowdown on some of the larger Eurozone economies, which seemed likely to cause them to run further below capacity than had earlier been expected. But the more recent signs are that the Eurozone economy is now picking up relatively strongly, and it is harder to understand the euro’s continuing weakness in the present context: it may just be a matter of time - for there is no doubt that the euro has considerable scope for appreciation. Taken together, Mr President, these various international developments since I was last here in Belfast have greatly complicated the task of monetary management here in the UK - in fact it has been just about the most difficult external environment that I can recall. At that time monetary policy was still aimed at moderating the pace of domestic demand growth to prevent the re-emergence of inflationary pressure - including wage pressures in the labour market. We actually raised rates by ¼% to 7½% shortly after my visit - but I promise you that was not a direct result of my visit here. But we reversed engines fairly aggressively when evidence of the effect of global slowdown on our own economy began to appear in the autumn - cutting interest rates from 7½% to 5% between October 1998 and last summer.
If a shock is sufficiently large, the financial network may consequently act as a conduit for transmitting rather than absorbing risk. So the flip side of greater integration is that it may have lowered the frequency but increased the magnitude of potential financial crises. 1 3 Improving the toolkit for financial stability analysis is consequently a very high priority for public authorities and for major financial institutions. Enhancing the capability to model the financial system under stress is the key challenge. 4 In recent years, many central banks and supervisory agencies, charged with the public policy goal of supporting the maintenance of financial stability, have sought to develop a socalled “top down” or “macro” stress-testing capability. Utilising information on balance sheet exposures, the authorities draw on macroeconomic and financial models to try to assess the impact of adverse shocks on the financial system. Several inter-related high level objectives can perhaps be set for an “ideal” stress test: •  To assess the vulnerability of the financial system to extreme but plausible shocks  •  To improve the understanding of the transmission of shocks through the financial system (and, in a worst case, the potential propagation of financial crises)  •  To identify “weak spots” in the financial system, to guide risk reduction priorities and crisis management planning  1  Systemic risk in modern financial systems: analytics and policy design by Prasanna Gai, Nigel Jenkinson and Sujit Kapadia, Journal of Risk Finance Vol8, No2, 2007.