| An old Japanese proverb says: "After you have won a victory, fasten the strap on your helmet even tighter." A victorious mood pervades the financial markets at the moment. Everywhere stockmarkets are up, interest rates stable, and banks are making record profits. Goldman Sachs, for example, reported profits of $1.9 billion for the nine months to the end of August double the figure in the same period last year. HSBC is on course to make $6 billion during 1996 more than twice as much as any bank before. Moreover, there appears no obvious threat that the good times will end soon. There is no sign of inflation re-emerging; most developing countries continue to implement reforms; bank managements seem to be more thoughtful and cautious than in the past. Such a period of euphoria is exactly the right time to stand back and prepare for the next downturn. We do not expect an imminent recession in the western economies or an immediate bear market. But economies and markets are cyclical a downturn will inevitably come sooner or later. That is why a major part of this issue (see page 54 on) is devoted to risk: to identifying the major risks that threaten the stability of the financial system; and to generating new techniques for quantifying those risks. |