only the downside. the asymmetry of payoffs embedded in peacetime bonus packages – “ heads i win, tails society loses ” – is neutralised somewhat by paying in cocos. this better aligns risk for shareholders and staff with the risks for society at large. there is an old lesson, here, about eating your own cooking. this ought to help discipline the chefs, reducing the temptation to pursue risky recipes in the first place. encouragingly, banking practice may already be beginning to match the theory. several banks have recently announced they will in future consider remunerating shareholders and staff in cocos. standard & poor ’ s ( 2010 ). calomiris ( 2010 ) and gordon ( 2010 ). bis central bankers ’ speeches conclusion tackling complex banking through complex regulation is to fight fire with fire. this is unlikely to work in theory. crisis experience suggests it has not worked in practice. a regulatory framework is needed in which the state is neither omniscient walrasian auctioneer ( shouting out hundreds of millions of risk prices ) nor deep - pocketed financier ( doling out hundreds of billions of taxpayers ’ money ). a regulatory gosplan will work no better for bankers than it did for tractors. the role of regulation is instead to set the overarching rules of the game. in tackling banking stress, that means the framework for banks ’ capital structure. as far as possible, that framework should aim to leave the pricing of risk ex - ante, and the consequences of risk expost, to the market. the framework outlined here could be one simple, robust and timely way to help achieve that. it is different. but it is far from radical. nothing could be less radical than returning banks, and banking risk, to the market. references berger, a n, davies, s m and flannery, m j ( 2000 ), “ comparing market and supervisory assessments of bank performance : who knows what when? ”, journal of money, credit and banking vol. 32 ( 2 ), pages 641 – 667. bordo, m, eichengreen, b, klingebiel, d and martinez - peria, m s ( 2001 ), “ is the crisis problem growing more severe? ”, economic policy vol. 16 ( 1 ), pages 51 – 82. calomiris, c w ( 2010 ), beyond basel and the dodd - frank bill, mimeo, columbia

david miles : monetary policy and financial stability speech by mr david miles, member of the monetary policy committee of the bank of england, at the bristol business forum, bristol, 14 july 2010. * * * i would like to thank conall maccoille and gilberto marcheggiano for research assistance and i am also grateful for helpful comments from other colleagues. the views expressed are my own and do not necessarily reflect those of the bank of england or other members of the monetary policy committee. monetary policy in the uk has never been as expansionary as it is today. just over 15 months ago the level of bank rate was reduced to what is – to all intents and purposes – its floor. as chart 1 rather starkly shows, this is the lowest level to which bank rate has fallen since the bank of england was established at the end of the seventeenth century. bank rate has not been changed for 16 consecutive meetings of the mpc. that is not so unusual. in fact, as the chart reveals, between 1720 and 1820 bank rate did not move from 5 %. had a monetary policy committee then met each month, as it does now, it would have decided at 1200 consecutive meetings not to change the level of interest rates. so it is far from unusual for the interest rate set by the bank to remain constant for over a year. and for much of the period since rates fell to the floor, policy has been actively changed – asset purchases have built up to now stand at around £200 billion. chart 1 bank rate from 1694 % so it is the level to which interest rates have fallen that is unprecedented. i believe it has been right to loosen aggressively the stance of monetary policy because of the scale of the deflationary and recessionary forces unleashed by the remarkably rapid downturn that followed the crisis in the banking sector. this crisis intensified dramatically in the autumn of 2008 when the banking system came close to total collapse. that would have been an outcome comparable in its impact to the failure of the system for electricity supply. many now argue that monetary policy should be set in a different way so as to reduce the chances of this sort of banking crisis. that is one of the issues i want to discuss today. the argument that the aims of monetary policy need to be broadened beyond a focus on inflation is one that deserves to be taken seriously because the damage done by extreme financial instability is great. if there were no tools better suited to help preserve financial stability than varying interest rates then