Earlier on I mentioned the importance of governance in the work of the PRA. It is one thing that can help generate robustness in the face of these uncertain developments. Good governance should lie at the heart of every organisation. It is not just about the role of the board but includes management, controls, oversight and management information. Good governance encourages better business practices and outcomes. Of course, well intentioned people can make sub-optimal structures work – just as good structures can be run poorly. But a better structure gives a firm a better chance of avoiding a big business mistake and of surviving an unexpected shock. Insurance retains highly talented and competent individuals. However, I have observed that the sector can be a bit of a “closed field”. I hear some firms – not all – talk of the difficulty in being able to appoint successful executives and even more difficulty in finding qualified, independent non-executives. Insurers also talk about the challenges of attracting young and  4  BIS central bankers’ speeches  ambitious individuals to supply the talent of the future. These people issues become particularly relevant in an environment under the Solvency II regime when the system of governance will be given even more prominence. I hope that the new Senior Insurance Managers Regime will be seen as both appropriate and proportionate to the needs of the industry and policy holders alike.
Over time, we would expect countries’ income levels to converge, as currently low income countries catch-up with their high income trading neighbours (Solow (1956)). This convergence process is a well-established empirical phenomenon (Barro (1991) and Mankiw, Romer and Weil (1992)). Accompanying this GDP convergence is likely to be catch-up in gross external balance sheet positions. As countries develop, so too does their integration into global capital markets, with higher levels of gross external assets and liabilities. Cross-country evidence bears this out. There is a well-defined empirical relationship between a country’s GDP per head and its gross external balance sheet position (Chart 16). BIS Review 174/2010  9  Taken together, these two factors imply a pattern of steadily rising gross capital flows over time, with growth strongest among countries catching up with their high-income trading neighbours. It is possible to calibrate these integration trends and project them forward to simulate future external balance sheets positions among the major economies. These simulations take as initial conditions cross-country GDP per capita, projected forward using a calibrated rate of growth convergence drawn from previous empirical studies and adjusted for known future changes in population growth. This gives a set of cross-country projections for GDP per capita. These are then translated into gross external balance sheet positions using historical relationships with per capita GDP. Chart 17 plots some projections of (the average of) gross external assets and liabilities relative to GDP for the G7 countries, China, India, Brazil and Russia. These projections go out to 2050.