. the framework for regulatory approval processes and the fitness and propriety test, relevant offences, and introducing the concept of conduct rules and statements of responsibilities ) are set out in legislation. but regulators were given considerable discretion in filling in the detail of the framework – including what functions required approval, the content of the conduct rules, and the detailed systems and controls requirements that apply to firms. ring - fencing. the act amended the pra ’ s objectives to incorporate ring - fencing, and set out the basic structural aspects of the regime ( in particular about the scope of the ring - fence ), while leaving much of the framework to be established via statutory instruments from the treasury. the statute also detailed matters related to ring - fenced banks ’ governance and policies which the pra should make rules about. the pra also implemented further details of the regime ( e. g. systems and controls requirements, capital requirements for ring - fenced banks, independence requirements, access to payment systems ) via rules. to be clear, i am not focused here on the question of whether or not the smcr or ring - fencing are a good thing, about which people will argue for decades. rather, i am focused on the legislative style which parliament adopted in order to introduce them – how this style compares to other models, and which model seems to fit best the principles set out above for a future financial services framework in the uk. see annex 1 the 2000 financial services and markets act ( fsma ) established the current domestic uk framework for financial regulation all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx to my mind, if we look across the four main legislative styles adopted by parliament in the last couple of decades – those for delivering fsma, smcr, ring - fencing and the eu model – the one that fits the principles best is the approach used for smcr : 1. robust prudential standards. it ’ s a tough regime which enables us to hold the top brass to account when things go wrong. 2. responsible openness based on international collaboration and standards. the approach taken works with the grain of the international financial system, and other countries have already borrowed heavily from it. 3. proportionality and sensitivity to business models, and promoting competition. the regime has left us room to tailor it so that it fits a small insurance company as well as it fits a huge bank. 4. dynamism and responsive

causes, or simply forecasts, sharply higher spending on consumer goods and new capital, it may indicate incipient inflationary pressures. policy tightening might therefore be called for - but to contain the incipient inflation not to arrest the stock - market boom per se. the second part of my prescription is for the fed to use its regulatory, supervisory, and lender - of - lastresort powers to protect and defend the financial system. in particular, alone and in concert with other agencies, the fed should ensure that financial institutions and markets are well prepared for the contingency of a large shock to asset prices. the fed and other regulators should insist that banks be well capitalized and well diversified and that they stress - test their portfolios against a wide range of scenarios. the fed can also contribute to reducing the probability of boom - and - bust cycles occurring in the first place, by supporting such objectives as more - transparent accounting and disclosure practices and working to improve the financial literacy and competence of investors. finally, if a sudden correction in asset prices does occur, the fed ’ s first responsibility is to do its part to ensure the integrity of the financial infrastructure - in particular, the payments system and the systems for settling trades of securities and other financial instruments. if necessary, the fed should provide ample liquidity until the immediate crisis has passed. the fed ’ s response to the 1987 stock market break is a good example of what i have in mind. i have expressed these two principles in rather simple terms ; they could be elaborated much further. taken together, they provide a strategy for policy that has a number of advantages : it keeps monetary policy focused on the appropriate goal variables, economic activity and inflation. it is transparent and easy to communicate to the public. it does not require that central bankers be systematically better than the market at valuing financial assets nor substitute policymakers ’ judgments of company prospects for those of investors. finally, and crucially, it is a robust strategy, in that - although it certainly does not eliminate all economic and financial instability - it protects the economy against truly disastrous outcomes, which history has shown are possible when monetary policy goes severely off the track. the opposing view : preemptive strikes against bubbles as i noted at the beginning, however, the framework just articulated is not universally accepted, particularly the aspect that precludes attempts to guide the course of asset prices. instead, a number of critics have argued that monetary policy should be more proactive in trying to