Price and financial stability, as well as safety and soundness of banks and insurers, are essential macroeconomic pre-requisites for sustainable prosperity, but they are not sufficient for its attainment. They are the foundations not the edifice. The Bank’s responsibilities are enshrined in statute. We pursue them under operational independence and are accountable to the people of the United Kingdom through Parliament for their achievement. Effectively discharging our responsibilities requires a deep understanding of the forces affecting the UK economy. EU membership entails some of the most important. There are three ways in which EU membership affects the Bank of England’s objectives:   First, to the extent it increases economic and financial openness, EU membership reinforces the dynamism of the UK economy. A more dynamic economy is more resilient to shocks, can grow more rapidly without generating inflationary pressure or creating risks to financial stability, and can also be associated with more effective competition.   Second, increased economic and financial openness means the UK economy is more exposed to economic and financial shocks from overseas. As a result of closer integration within the EU and, more recently, with the euro-area crisis, this may have increased the challenges to UK economic and financial stability; and    Third, EU regulations, directives and rules define many of the Bank of England’s policy instruments particularly in relation to financial stability. These must be sufficiently flexible and effective to manage the consequences for the United Kingdom of shocks originating at home and abroad.

While accountability should produce similar benefits for the other objectives of central banks, this is still very much an unexplored issue. As regards financial stability, one probable reason for this is that it is much harder to define financial stability than price stability. Another may be that the central bank seldom has sole responsibility for financial stability, sharing responsibility instead with the Ministry of Finance. A clear division of tasks among the authorities is important for producing accountability. In Sweden, a large part of the responsibility for financial stability has been delegated to the Swedish Financial Supervisory Authority. The Riksbank and the Swedish FSA recently signed a so-called Memorandum of Understanding which outlined the responsibilities of the two authorities in the area of financial stability. The aim of this is to facilitate co-operation and increase efficiency in the work of each authority towards the common objective of financial stability. According to the Riksbank, the three most important factors for financial stability are the soundness of the financial institutions, contagion, and the efficiency of the financial infrastructure. The main role of the FSA is to ensure that institutions operating in the system are sound. The Riksbank, on the other hand, is responsible for the oversight of systemic risks and the efficiency of the infrastructure. This framework, however, should be open to question. For example, it might have to be altered in order to accommodate changes in the  BIS Review 24/2003  1  financial system.