the government is ensuring that stability does not fall by the wayside, into the gap between monetary policy at one end of the spectrum and the regulation of firms at the other. as the governor of the bank said recently at the mansion house, an important part of the fpc ’ s role will be to steer, to orient the work of the microsupervisors in the light of the assessment of short - term and longer - term risks to stability. that was in evidence at the fpc ’ s very first meeting, a fortnight ago. the financial policy committee ’ s first decisions the decision and record of that meeting were published last week. they increase transparency around financial stability policy, and are instructive for what lies ahead. it will have been no surprise that the committee regards the current economic and financial environment as presenting very real risks to stability, with the euro area ’ s problems foremost amongst them. the committee decided to advise the fsa to find out more about the banking system ’ s exposures, to disclose more, and to get the banks themselves to disclose more. as part of that, fsa will be looking more closely at banks ’ forbearance policies and practices. that is not just about internal systems and controls, important though they are. it is, centrally, about forming judgments on the adequacy of provisions. as such it is a step towards supervisors satisfying themselves about the broad robustness of bank ’ s asset valuations and risk weightings – a vital element of assessing capital adequacy. crucially, beyond that, the committee asked the regulators to ensure that, in the quarters ahead, banks should build their capital resources by retaining more than usual of their profits when profits are buoyant. although the fpc does not yet have statutory powers, this was a sizable step away from the role played by the bank over the past decade or so. it is not a sermon. it is a plan. to give it teeth, the committee considered whether or not to set quantitative limits on distributions and / or qualitative guidance on what should be treated as “ buoyant ” profits. but given the highly varied circumstances of uk banks, we concluded that it is more sensible in the first instance for fsa to work out the details in its supervision of individual firms. these will be meaningful discussions, and fsa will report back to fpc on progress. that measure is being taken in order to make the uk banking system more

the demand side - aiming to keep the growth in aggregate demand more or less continuously in line with the underlying, sustainable growth in the supply - side capacity of the economy. i probably need not remind an industrial audience what happens if we get it wrong and let demand run ahead of supply. the inevitable result is accelerating inflation, with all the damage that can cause - by distorting the outcome of investment decisions and obscuring the relative price signals that direct resource allocation. in the end we know that demand has to be brought back under control. the choice typically is not whether or not to tighten policy but whether to tighten sooner or later ; and there is a strong presumption that by tightening sooner - before excess demand really takes hold - we will need to tighten less - to moderate the pace of growth of demand rather than bring it to a shuddering halt or even send it in reverse. too often in the past the mistake has been to tighten policy too little and too late, contributing to an exaggerated, boom and bust, economic cycle and thereby encouraging an unduly short - term approach to both financial and physical investment. so in trying to maintain effective price stability, in trying consistently to achieve the government ’ s inflation target, of 2½ % for underlying retail price inflation, what we are really trying to do is to achieve economic stability in the much wider sense of ensuring that aggregate demand grows in line with our productive potential. if we are successful in that, then the financial and business communities will become more confident of making longer - term decisions, and in that way we can contribute indirectly to improving the underlying supply - side of the economy. this objective is now very widely understood and accepted. but it is, of course, much more easily said than done. since the recession of the early 1990s we have in fact been reasonably successful in maintaining this broader economic stability in this country. inflation has been brought down to, and maintained at, the lowest rate we have seen in a generation ; but, even more important, we have also seen relatively steady growth over this period and a sustained and very welcome fall in unemployment. but it has to be recognised that the going is now becoming more difficult, for two main reasons. the first is that we began the present period of expansion in 1992 with a good deal of slack, or spare capacity, in the economy - following the recession - and that slack has now been more or less reabsorbed. in the past year, in particular, the pace