A third source of vulnerability is the large degree of connectivity and interdependency of the financial sector. Y2K and the terrorist attacks of September 11, 2001, highlighted this type of vulnerability. One key lesson learnt was that vulnerability extends beyond these systems since they crucially rely on utilities such as electricity and telecommunications or on service providers like S.W.I.F.T. Let me sum up again. There are three major sources of a financial system’s vulnerability: economic concentration, geographic clustering, and connectivity and interdependency. The latter are an obvious characteristic of financial networks. Networks contribute to increased efficiency and facilitate risk management. At the same time they also can act as channels as well as origins of systemic crisis. From vulnerability to resilience Hand in hand with a new awareness of the vulnerability of the financial system, those responsible for its safety and stability in private firms, in financial market infrastructures as well as in the regulatory agencies have recently been taking a new hard look at the financial system’s capacity for resilience. In retrospect the Y2K problem was a first mild but nevertheless rather valuable test. The Y2K test was mild in the sense that everybody had enough time to prepare for it. What helped in Y2K was the clear deadline. All the contingency and communication networks could be set up before the event. Many of us gathered here today knew exactly where we had to be on December 31, 1999, what we had to do and whom we had to call if there were problems.
9  This view is discussed fully in Benito, A, Thompson, J, Waldron, M, and Wood, R (2006), “House prices and consumer spending”, Bank of England Quarterly Bulletin, Summer, pp. 142-154. 10  Some household level evidence for this view is given by Attanasio, O, Blow, L, Hamilton, R, and Leicester, A (2005), “Consumption, house prices and expectation”, Bank of England Working Paper No. 271. 4  BIS Review 7/2008  But even if there is not a strong causal connection between house prices and consumption through a wealth channel, there may nevertheless be a significant collateral channel. When house prices fall, the amount of housing equity and hence collateral at homeowners’ disposal decreases. This will tend to delay spending as lenders are willing to lend less or lend on less favourable terms to those who have little or no housing equity. That channel should have become less important in recent years. This is because most homeowners have substantial equity in their homes which would not be materially affected by relatively modest changes in house prices. 11 This may help to account for a decline in the correlation between real house price growth and consumption since the beginning of the decade (Chart 10). An analogous collateral channel may operate in the corporate sector. Declines in commercial property prices will weaken corporate balance sheets and this could affect corporate spending if lenders raise the cost of borrowing to affected companies. This effect is likely to be particularly pronounced among commercial real estate companies.