wilder and wilder. that might not matter were the consequences limited to the party - goers. but they are not. when the party ends, some innocent bystanders may lose their homes altogether. moreover, the party - goers aren ’ t just deposit - taking banks. a wide range of financial institutions, including investment banks, monoline insurers, even hedge funds, have the potential to cause significant damage to the rest of the economy in the wake of their demise. are they all to be helped to get home safely when the party ends? if so, will they all be regulated in the same way as banks? if not, how can we limit the potential cost to the taxpayer? add to this the problem that many of these institutions are global in scope, but the responsibility for both regulation and rescue remains firmly at national level, and you can see why policy - makers get headaches as bad as the party - goers ’. no individual bank, or indeed the authorities, can easily find a way out of this because their incentives are to continue in the same manner. there is, therefore, no point blaming anyone for the outcomes. but together we have to find an answer. of course, excessively strict and detailed regulation would mean that there were no parties worth going to and the economy as a whole would suffer from a suppressed and inefficient financial sector. that is why requiring financial institutions to hold more capital to act as a shock absorber, while reducing the procyclical nature of existing capital requirements, may offer a balance between excessively burdensome regulation and excessive risk - taking. the proposals in the banking bill, and the other changes i have discussed today, will take us an important step forward in the creation of a framework for financial stability. but they will not be the final answer to a difficult, at times seemingly intractable, problem of how to change the incentives of both private and public actors to reduce the frequency and cost of financial crises. for that we will all need to do a lot more thinking. it is important that we do find the right solution. an efficient and thriving banking sector which can intermediate saving and investment, both domestically and internationally, is essential to our economic prosperity.

mervyn king : banking and the bank of england speech by mr mervyn king, governor of the bank of england, to the british bankers association, london, tuesday 10 june 2008. * * * after a decade or more of economic stability, we are now facing a period of rising inflation and falling economic growth. part of the reason for this change of economic weather is that we are passing through the most prolonged period of financial turmoil that most of us can remember. whether, as the imf has argued, it is the worst period of financial stress since the 1930s is too early to judge. after all, the crisis is not yet over. since last august there has been a great deal of soul - searching about what we all might have done differently, both before and after 9 august when the crisis hit. and in circumstances where livelihoods are at risk it was inevitable that the “ blame game ” was played. unfortunately, although such a game helped to fill newspaper columns, it generated more heat than light. so today i want to step back. financial crises have been a regular, and disturbing, feature of our and other developed economies for as long any one can remember. they are as frequent now as in the nineteenth century, when henry thornton and walter bagehot were developing their ideas about how central banks could prevent instability in the banking system. are these repeated crises the inevitable result of human nature at work in financial markets, with greed and fear alternating as sentiment swings from irrational optimism to irrational pessimism? or is it the failure over many years to find the right incentive structure for banking markets? or is it a mixture of both? i don ’ t pretend to be able to offer a complete answer to those questions. but i do want to focus on the relationship between the bank of england and the banks because it helps to explain why crises occur and what we can do about them. let me start by saying that, although i do think the role of the bank needs to be enhanced, it would not be right for the bank to take back banking supervision from the fsa, as some have suggested. we should remember that the period before 1997, when fsa and the “ tripartite arrangements ” were set up, was not seen at the time as a golden age of official oversight of banks. before 1997 the relationship between the treasury and the bank of england in respect of banking supervision was often fraught. remember too that the experience which shaped the design of the 1997 settlement was that