Importantly we – and you – can see how we are performing month by month in relation to our mandate. We also have a tested analytical framework. We model possible future outcomes and we look at the balance of risks around a central view. We can rely on experience and judgement to make regular policy decisions. And we can alter our policy decision on interest rates each month as the data and circumstances evolve. ii)  Financial Stability and why it is different  If financial instability occurs, costs to society may be high. Damage to our reputation could be potentially high too. Yet judging the optimal amount of resources to devote to prevent crises is problematic. What degree of resilience do we want? And what should we be prepared to pay for  BIS Review 36/2005  1  insurance? This is a familiar problem in public policy – what is the optimal size of the fire brigade or army? The challenges we face in seeking to maintain financial stability are very different to those in the monetary policy arena. •  Firstly there is neither a clear over-arching analytical framework nor a commonly agreed set of indicators of incipient financial instabilities. •  Secondly the task is made harder because we are dealing with tail events – low probability scenarios – rather than central projections. It is about aberrant rather than normal behaviour and situations: less predictable and harder to model.
As I have said before this is an area of potential vulnerability that has developed alongside the rapid globalisation of markets and of firms operating within them. I personally feel that it has been somewhat overshadowed in recent times by work in other areas such as capital adequacy. We feel that we can make a particular contribution here – both owing to our position in such a major global financial centre and because, in sterling at least, we are a potential provider of liquidity. So we justify devoting significant resources to the analysis of liquidity issues, and the development of potential risk reduction strategies for liquidity problems – nationally and in particular internationally. At the other extreme, whilst we feel strongly about the desirability of robust and widely applied accounting standards – and are prepared to express our views on the big picture aspects of this from time to time – we do not devote significant resource to analysis, or lobbying in this area. c)  Preparation for a Financial Crisis  And finally, tail event territory though it may be, we need to undertake preparation for financial crises. We need to think forward to being “in-event” where instability has actually been triggered, whether by a business failure of a firm or firms or by a terrorist or other disruptive event. We need to prepare now, in advance, to enhance predictability at what would be a time of great uncertainty.