line of defence, it should be seen as one of the last lines of defence. the question then becomes how do we ensure that it does not – because we lack other instruments – have to be used as a first line of defence? here the financial crisis and recession has led to the development of what is now called “ macroprudential policy ”. bis central bankers ’ speeches in essence, macroprudential policy means using the regulatory “ stance ”, the underlying settings of the regulation of the financial sector, first to reduce the probability and impact of systemic crisis and then, by varying those settings, to counter emerging threats to financial stability. the bank now has a sister committee to the monetary policy committee, the financial policy committee ( fpc ), with extensive powers to set and change the regulatory stance for the financial system as a whole in order to safeguard financial stability. like the mpc, it has external members, drawn from outside the bank ’ s executive team, a published record of its meetings and a regular financial stability report to explain how it is using its powers to achieve its statutory objectives. there is substantial cross - membership between these two committees to ensure effective policy co - ordination. but though the institutional set up for the financial policy committee mirrors that of the monetary policy committee, the nature of its task is different. the monetary policy committee is, in the main, engaged with guiding the economy towards the best achievable path for output consistent with keeping inflation at target – or with bringing it back to target. in the jargon – which some of you in the logistics field, for example, may be familiar with – the problem is one of “ optimal control ” or “ dynamic programming ”. what setting for interest rates is consistent, looking forward, with the best central outlook for the economy? the financial policy committee ’ s job is really about identifying risks and preventing them from crystallising. this is not just about the most likely and visible risks. what we learned in the financial crisis was that the financial system, has a myriad of connections and actors and a phenomenal ability to change and adapt. it needs to be thought of as a complex “ ecosystem ”. at times of stress, it can behave in very extreme ways – or break down altogether. in such a world, it is not enough to know that every individual part is managing its own risk. you have to know that when the parts come together and act upon each other, the system as a whole is res

in the uk. we know the pressure from demand for homes is great and that the supply of new homes is quite weak. if such an outcome came to pass, the proportion of mortgages at high multiples of the borrower ’ s income could rise substantially. debt would grow and become more concentrated. financial stability and the economy would be more exposed to a shock and one which, if it bis central bankers ’ speeches crystallised, could derail a sustained and durable expansion. the fpc ’ s recommendation should be seen as insurance against that risk crystallising. consistent with its role as risk manager, the fpc has acted in advance to identify and to protect against a very major risk to the financial system and the economy. to return to where i started. the bank of england is for stability. monetary and financial stability. we do not achieve that, any more, by holding gold. we aim to address that through the actions of the mpc and the fpc. the first aims to balance supply and demand and so steer the economy to keep control of inflation. the second aims to preserve financial stability by ensuring the underlying financial system is resilient by identifying risks and taking action to prevent them crystallising. the stress test of the major uk banks towards the end of the year will assess the resilience of the system to a major crash. the steps taken last week are insurance against the possibility of a sustained boom in the housing market leading a substantial increase and concentration in household debt that could make a crash more likely and more severe. and finally, just in case despite this speech, i am deluged with requests to visit the bank ’ s gold vaults, i am afraid there are very good security and safety reasons why we cannot offer this. but i can recommend that on your next trip to london you visit the outstanding bank of england museum just off threadneedle street. it is free. and you will be able to try to pick up one of our two bars of gold. most important of all, there is an excellent game that will allow you to try your hand at maintaining monetary and financial stability. because stability is what the bank of england is for. bis central bankers ’ speeches