causes the central bank to become over - protective of individual institutions, giving rise to moral hazard in the system as a whole. we were conscious of these tensions in the “ old ” bank, although we found effective, informal, ways of reconciling them. there are therefore powerful reasons for including banking supervision among the responsibilities that are to be transferred to the fsa. the trick will be to ensure that the bank ’ s capacity to identify and address emerging “ systemic ” financial problems - that is those which may have a significantly disruptive effect on the financial system as a whole rather than just on individual financial institutions - is not damaged in the process. and the key to that is that both the bank and the fsa should have a clear understanding of their respective responsibilities, and that they should continuously work very closely together to ensure that they keep sufficiently out of each others hair without letting things disappear between the cracks! our ongoing relationship was formalised during the summer in a memorandum of understanding ( mou ) agreed between the bank, fsa and the treasury. this defines very carefully our respective responsibilities and provides for both the bank and the fsa to exchange information freely and to consult where our interests interact or overlap. it helpfully establishes a high - level treasury - bank - fsa standing committee, which will provide a forum in which a common position can be developed in relation to emerging problems. and, as a further means of ensuring that we are aware of each other ’ s concerns, the chairman of the fsa will become a member of court, while the deputy governor responsible for financial stability will serve on the fsa board. in the end the success of these arrangements will depend upon the working relationships between our respective staff at all levels, and it is helpful in this context that our own supervisory staff are moving to the fsa which will help to ensure that we establish the right working relationships from the beginning. but we will need to work at these relationships continuously to ensure that they are embedded into the future. systemic risk relieved of our responsibility for supervising individual banks - and it is a considerable relief i can tell you - the “ new ” bank can concentrate its energies on detecting and limiting systemic financial risk. that is a responsibility of central banks everywhere, and because it involves close monitoring of economic and financial market developments nationally and internationally - it fits more naturally and comfortably alongside our responsibilities for monetary stability. this responsibility will be overseen by a new, internal, financial stability committee which effectively parallels the role and

- or deposit - taking - sector specifically, because one of the essential services we undertake is the provision, through our money market operations, of sufficient cash day - by - day to the banking system to allow it to balance its books. without that the banks collectively would need to hold more cash with the central bank in place of interest - bearing liquid assets than they do at present. these “ cash ratio deposits ” in this country have hitherto been voluntary. the new bill puts them on a statutory footing, with the rate of deposit to be determined by the government. the charge on the banks in this form has always been lower than in other major centres. this reflects the fact that the bank of england is among the lowest cost central banks in the world - with a fraction of the staff of the bundesbank, the banque de france or the federal reserve system even when adjustment is made for differences in function. the charge will certainly now be significantly lower to reflect inter - alia the transfer of banking supervision to the fsa. but i recognise that whatever our costs we need to be accountable for the resources that we use and the burden we place on the banking system. we will now be more accountable to court, to the government that will set the charge, to the banks themselves and the wider public through our annual report. the bank ’ s functions below the court the new bank will be organised administratively into three main subdivisions, reflecting our responsibilities for monetary stability and financial stability, each under a deputy governor, with the third subdivision responsible for all forms of financial market operations, under a senior executive director. the central services of the bank, including personnel and finance, will report to the deputy governor, financial stability, who will remain responsible for the day - to - day management of the bank. the main changes in the bill affect our monetary stability and financial stability functions, which i will discuss in turn. monetary stability let me start with monetary stability - although the new arrangements may be familiar to you not least because they are in place already! the chancellor decided last may that he would no longer exercise his powers to set short - term interest rates. anticipating the bank of england bill, he set an inflation target and delegated the technical implementation of monetary policy to achieve that target to a new monetary policy committee established within the bank. the monetary policy committee has been operating independently in setting interest rates ever since. this position is formalised under the bill. with respect to monetary policy the bill defines the bank