The crises during the 1990s revealed serious flaws not only in macroeconomic management but also, just as importantly, in the structure, regulation and operation of the financial system. Most major financial crises in various countries around the world emanated from overriding economic or financial problems rather than bank-specific issues. If these overriding problems had been identified at an earlier stage, the crises might have been prevented or at least their effects might have been reduced. Financial stability work Banks are the focus of all work on financial stability. This is because banks are the institutions that ensure the functioning of the payment system. We know from experience that if individuals and companies are unable to make ordinary payments, or if the credit function of society is disrupted, this may have disastrous effects on the economy. Insurance companies, finance companies, security brokers and other firms may also be important in society, but they are not critical to the system in the same way as banks. But banks are not only critical for stability. Their balance sheets also contain a built-in source of instability. Banks’ funding is generally short term in nature and can quickly disappear, while their assets have long maturities and cannot be realised as quickly. Should depositors and financiers lose confidence in a bank, it could face an acute liquidity crisis. Moreover, problems in one bank can spread to other banks.
Mervyn King: A tale of two cities Speech by Mr Mervyn King, Deputy Governor of the Bank of England, at Cardiff Business School, Cardiff University, 18 June 2001. *  *  *  Vice-chancellor, ladies and gentlemen, It was once said that economic forecasters are the unfathomable in pursuit of the unpredictable. As a student I found this odd. Whenever England played Wales at rugby the result was wholly predictable. The reason was simple. My fellow-student, Gerald Davies, ran faster than Englishmen, even when he carried the ball and they didn't. Economics is, unfortunately, less straightforward. Yet any decision that involves an elapse of time between its implementation and its effects requires a forecast. Time lags are the essence of the transmission mechanism of monetary policy. And that is why the Monetary Policy Committee spends much time thinking about the likely future path of the economy. The severe limits on our ability to anticipate future events means that forecasts can be no more than a description of the relative likelihood of a range of possible outcomes. Anyone who presents you with a point forecast for the future path of the economy is either concealing the most interesting part of their analysis, or suffering from self-deception. So the Monetary Policy Committee presents forecasts in terms of probabilities. And it is the balance of risks to the economy which determines monetary policy. So what are the balance of risks to the British economy at present?