financial crisis without the active involvement of the central bank. central banks are currently at the heart of efforts to restore confidence in the banking system by the provision of liquidity against assets which have proved to be highly illiquid. but the recent challenges presented by the latest episode of financial turmoil suggest that much hard thought will need to be given to the structure and nature of banking regulation in the future. in the longer - term, it seems extremely likely that banks and other “ near ” banks, especially those that have been regarded as similar to banks in terms of their eligibility for financial assistance, will be called upon to hold more capital and a greater quantity of liquid assets than hitherto. it is too early to foresee clearly where the long - term direction will go. but serious thinking and a willingness to contemplate radical change will be necessary.

not focus on growth for a while and forget about inflation? the answer is that once higher inflation becomes entrenched, it may be costly to dislodge. past uk recessions were associated not with slowdowns in the world economy, but with attempts to squeeze inflation out of the uk economy. the best thing that we can do to promote economic stability is to avoid inflation, and inflation expectations, from becoming dislodged from the target in the first place. the most important function of an independent central bank is its role in monetary policy. price stability is a necessary foundation of economic stability more generally. but central banks around the world are also called upon to engage, to a greater or lesser extent, in the supervision of financial institutions. unlike monetary policy, where in large part a common framework prevails around the world, there is no uniformity in the roles played by central banks in the supervision of the financial system. the supervision of financial institutions is sometimes regarded as part of the functions of a central bank and sometimes given to one or more other regulatory bodies. it is striking how varied are the arrangements in different countries. in the united kingdom, an important ingredient in the 1997 reforms which took banking supervision away from the bank of england and handed it to a single regulatory body, the financial services authority, was the view that it was no longer sensible to try to distinguish commercial banks from investment banks, and banks from securities companies. a common regulatory framework was needed. there are, however, important differences between prudential supervision and “ conduct ” of business regulation, so some countries have adopted a “ twin peaks ” solution in which the central bank is responsible for prudential supervision and conduct of business regulation is given to a different body. this is evidence that the appropriate division of responsibilities will depend on local circumstances. one of the most important of those is the number of institutions which merit supervision. in a country with a limited number of banks it is less clear that a separate supervisor is needed and the central bank may well be able to take this responsibility on without risk to its reputation or of other contagion to its primary monetary policy responsibilities. in contrast to monetary policy, where the appropriate institutional framework is common to all countries, there is unlikely to be uniformity in the roles played by central banks in the supervision of the financial system. regardless of where responsibility for regulation lies, it is hard to imagine taking steps either to prevent, or to deal with, the consequences of a