The current global crisis, however, exposes another important dimension of systemic risk where interactions within the financial system, as opposed to interactions between the financial system and the macroeconomy, have played a critical role in amplifying the losses. As we know, back in 2007, losses associated with the subprime mortgage market were initially estimated to be in the order of $ 50 billion. Thereafter, the dynamic of the interactions within the financial system, driven by risk management practices of banks, the response to the funding liquidity constraint by market participants, and heightened concern about counterparty risk, resulted in a protracted period of market distress, the drying up of liquidity, and set the stage for a spiral of losses. As it turns out, writedowns and losses worldwide have grown enormously. And to an appreciable extent, this amplification of losses is related partly to the interactions and the feedbacks within the financial system. Therefore, compared to the “time-dimension” of risk associated with procyclicality through which credit risk is a major propagation channel, the current crisis shows that the dynamic of the interactions within the financial system can also be very damaging, particularly in the financial system that is large and complex. In the current crisis, the forces at work were the positive feedback loops and the interactions amongst them. The interactions operated through the propagation channels of joint exposures to common risk drivers and network linkages between the financial institutions. In general, the feedbacks within the financial system can be both positive (i.e. selfreinforcing) or negative (i.e. dampening).
Mervyn King: Monetary policy developments Speech by Mr Mervyn King, Governor of the Bank of England, at the CBI Northern Ireland Mid-Winter Dinner, Belfast, 22 January 2013. *  *  *  I am delighted to be in Belfast to deliver my final regional speech as Governor. After the Bank obtained independence in 1997, we decided to establish a physical presence in Northern Ireland for the first time. And I was able to announce the opening of the Agency when I visited Belfast in May 1999. Since then the links between the business community and the Agency have gone from strength to strength. None of this would have been possible without the commitment of a remarkable group of Bank of England Agents: first, Nigel Falls, then Phil Eckersley and now Frances Hill, all supported by Gillian Anderson, today the Deputy Agent. During that same visit, I met with a group of politicians from right across the political spectrum. They were surprisingly eager to talk with, not at, each other – because they wanted to exchange views about the economic future of Northern Ireland, and to get away, at least for a while, from the divisive nature of daily politics. You would have been hard put to identify the affiliation of those politicians from their views on how to promote economic prosperity in Northern Ireland. And this is the key to the future.