Risk management and control

The positive sentiment seen at the end of first quarter 2008, that the credit crisis may be easing, was short-lived as trading conditions deteriorated significantly in the second half of May. A number of factors triggered the market decline, including inflation fears following a sharp increase in oil and food prices, market consensus that the US Federal Reserve had finished cutting interest rates, further dislocation in the US housing and broader credit markets, and continued concern over monoline insurers and certain financial institutions. As a result, second quarter 2008 ended with credit spreads and equity markets returning close to the levels observed at the start of April, while US interest rates ended higher.