our respective responsibilities in relation to financial stability and provides a structure for the necessary close cooperation between us. in the terms of the mou the bank is responsible for the overall stability of the financial system as a whole. the mou implicitly recognises the inter - relationship between monetary and broader financial stability, which is fundamentally important : just as we could not hope to deliver monetary stability if the financial system was crashing around our ears, so, too, monetary stability is a very necessary though in itself still insufficient - condition for stability of the financial system. specifically the mou recognises the bank ’ s role - as the bankers ’ bank - at the heart of the payments system ; and it recognises our capacity, in exceptional situations and subject to override by the chancellor, to act as lender of last resort in order to limit systemic damage. the mou acknowledges more broadly the bank ’ s oversight role which enables us to advise on the financial stability implications of developments in domestic and international markets and payments systems ; and it acknowledges finally also our role in promoting the efficiency and effectiveness of the financial sector, with particular regard to international competitiveness, but which can also contribute to the robustness of the financial system. in the context of the uk ’ s highly developed and increasingly integrated financial services industry, in which distinctions between banks, building societies, investment intermediaries, insurance companies and so on have been becoming increasingly blurred, the argument for moving away from a fragmented supervisory and regulatory structure, in which banks were separately regulated, was compelling - and howard and his team have done a tremendous job in bringing all the different strands of financial services regulation together under the fsa umbrella seamlessly and in a relatively short space of time. a potential downside from the bank of england ’ s perspective was the possible loss of information from, or contact with, the banking sector which might reduce our capacity to exercise our responsibility for the stability of the financial system as a whole. now of course it is early days to begin to assess the new arrangements from this perspective. it is true that we have not had any serious threats to financial stability in this country over the past three years, but i suppose that putting that down to the new structure would be a bit like the man who claimed that the absence of pink elephants in hyde park was the direct result of his clicking his fingers there on his regular morning walks. we really haven ’ t been tested. all i can say is that i am encouraged by the close cooperation between

; these rules also need to be strictly applied. the greater emphasis that has recently been placed on the notion of “ flexibility ”, and the european commission ’ s comments four weeks ago regarding its future interpretation of the fiscal rules give reason to fear for the binding effect of the rules. relying on fiscal rules alone will not help to overcome the euro area ’ s vulnerability to crises once and for all. on the contrary, additional steps are needed to strengthen the disciplining effect of capital markets on fiscal policy. in that sense, the principle of individual national responsibility ultimately means that governments, too, must be allowed to fail financially. 4. 3 making the financial system more resilient and effective sovereign default, however, is still a tricky issue where financial stability is concerned. making the financial system more resilient, and banks less vulnerable, is therefore the third item on the “ to do list ” to bring the euro area back on track. this, by the way, is not a challenge exclusive to the euro area, although it is particularly relevant there. in a comment piece published in the financial times about a year ago, tim harford wondered : “ why can ’ t banking be more like baking? ” referring to the great fire of london almost 350 years ago, he wrote : “ the last time a baker laid waste to the city was 1666 [ … ] ; bankers seem to be able to perform the trick more frequently. ” despite the similarity in spelling there are, of course, significant differences between those two lines of business which explain, for example, why we need a european banking union but not a baking union in terms of a single trade supervision for bread makers, say. systemic importance, the “ too big to fail ” issue, and information asymmetries are just a few of the special features that distinguish the financial sector from non - financial business areas. the financial crisis laid bare that banking regulation – or metaphorically speaking : the fire protection – had been insufficient. this was a key lesson learned from the crisis, and the regulations have been tightened over the past few years. however, the regulatory agenda has not been completed. in order to prevent too much business from being shifted from the regulated banking sector to the unregulated shadow banking sector, we need to adequately regulate the latter as well. as i have already said, financial reform is of particular relevance for the euro area – the financial system turned out to be the achilles ’ heel of monetary union. the introduction of