And the threat of contagion from the parent may remain anyway. There are of course a myriad of shared approaches between these extremes as well. What have we seen in practice? 5  Understanding international bank capital flows during the recent financial crisis; Hoggarth, Mahadeva, Martin; September 2010. BIS central bankers’ speeches  3  I would describe the approach in the run up to the crisis as one of fragmentation – with host supervisors focused on local risk in local entities and home supervisors unappreciative of some of the risks taken overseas. Host supervisors did not fully consider risks from the parent group. Information sharing was fitful. Colleges – gatherings of relevant supervisors – were fairly rudimentary. And while there were some attempts to increase home-host coordination, in practice there were material gaps. This meant that neither host nor home supervisors had sufficient information to assess the risks to domestic financial stability posed by overseas firms. A key lesson we learnt in the crisis as host supervisor was the manifestation of global risks in local entities, and the importance of home-host information sharing and coordination. For example on the wholesale side, Bear Stearns and Lehman both saw problems occur outside their UK operations, where we had little sight of developments, and which led to uncertainty, loss of confidence and a flight of short term wholesale funding. Similar issues arose on the retail side, where some overseas banks had taken significant amounts of retail deposits very quickly whilst others had provided significant lending to UK borrowers.

And I would hope, on this evidence, that the future evolution of our approach to overall economic management would be in the direction of further improvements to our supply-side flexibility, rather than any retreat from the present emphasis on macro-economic stability. Of course I am well aware that a stable overall macro-economy does not - and cannot - mean equally stable economic conditions for every individual sector or individual business. A particular complication over the past few years has been the surprisingly persistent strength of the exchange rate against the euro, itself a reflection of the puzzling more general weakness of the European currency. This has contributed to an uncomfortable imbalance within the UK economy primarily between the euro-exposed sectors, which have been under consistent pressure, and the domestically-oriented sectors, which have by and large been doing relatively well. Understandably the suffering sectors and businesses tend to complain that monetary policy takes too little account of their position, often pointing out that inflation has for the past two years fallen somewhat below the target. The implication is that monetary policy has been tighter - interest rates have been higher - than was necessary, which, they say, in turn at least helps to explain the behaviour of the exchange rate. I hope you won't think me patronising if I tell you that I have genuine sympathy with their concerns. Indeed I very much admire the huge efforts that many of them have made to overcome the disadvantage coming from the strong exchange rate.