I would like to end by raising a couple of questions about the future shape of financial markets. The first is the extent to which we should be integrating both our analysis of risk and our approach to regulation between the insurance industry on the one hand and capital markets on the other. Quite apart from the increasing institutional interlinkages, the extent of risk transfer now going on between different parts of the financial sector demands a consistent approach to capital requirements across the sector as a whole. A second issue is the need to reflect liquidity conditions in determining the appropriate level of capital. If an asset can be disposed of quickly - that is if there is a robust liquid market for the asset concerned - the capital needed to guard against unexpected price movements will be less than if the prospective holding period is long. Liquidity conditions can of course vary dramatically not just between different instruments but over time and understanding how and why they vary will, I think, be an important area of investigation for the future. Conclusion That concludes a quick summary of some of the financial stability issues relating to risk and capital levels that we at the Bank of England are working on at the moment. Central bankers are by their nature a worrying breed (in both senses of the word! ), and commentators often note the regularity with which the Monetary Policy Committee says that it finds the outlook 'more than usually uncertain'.
I want to say a little about the tragic events of September 11th, which have further underlined the complex nature of the world we live in. Second, I would like to look at some of the ways in which formal models of market and credit risk of the type you will be studying here have already influenced the design of our regulatory regimes. Much has been achieved here, but much also remains to be done, and the current state of the art by no means captures every type of risk run by financial firms. So, third, I want to talk about some other safeguards which will continue to be necessary to improve the chances of maintaining financial stability. The Bank of England's role in financial stability The maintenance of stability in the overall financial system is one of the Bank of England's three core tasks - the other two being responsibility for monetary stability, and promotion of the efficiency and effectiveness of the UK financial system. That concern for system-wide financial stability does not reflect a paternalistic belief that central banks know better than the markets - indeed market disciplines have a very important role to play in maintaining stability. Rather, it derives from the fact that some types of problem which initially affect only individual financial institutions may subsequently threaten the stability of the system as a whole.