of idiosyncratic problems in johnson matthey, bcci and barings, not a system - wide crisis affecting the liquidity of the banking system as a whole. as a result, the tripartite memorandum of understanding which underpinned that settlement was not so much faulty as incomplete. since the onset of the crisis last summer, the way in which the tripartite arrangements work in practice has evolved considerably. the concept of a golden age in the relationship between the bank and the banks is also far from the truth. our relationship was described by david kynaston, in his magisterial history of the city, as “ surprisingly prickly ”. in the 1920s the chairman of the midland bank, reginald mckenna, derided the governor, montagu norman, as “ an intellectual without an intellect ”, and in turn norman said about mckenna, “ some people cannot avoid the limelight ”. since the crisis broke last august we too have had our differences, although more recently the close cooperation between the bank of england and six of the largest banks in working through the details of our special liquidity scheme was a model of effective collaboration. but perhaps we should not be surprised that sometimes our relationship is “ prickly ” because our interests do not always coincide. banks are, entirely legitimately, concerned primarily with their commercial interest. the bank of england is concerned with the interests of the uk economy as a whole. the two sets of interests are not always the same. where they may clash is over the use of our balance sheet. companies which have misjudged risks or their business model should generally be allowed to fail to encourage prudent behaviour by others. but the failure of a bank can have an impact that goes well beyond the importance of that bank alone – so - called systemic risk. that is why central banks have sometimes acted as “ lender of last resort ”. it can then be difficult for the authorities to make a credible commitment that in future banks will be allowed to fail. and that can in turn encourage banks to take greater risks – both in maturity transformation and lending – enabling them to earn higher profits. because the authorities will face an incentive to step in to rescue banks tomorrow, there is an incentive for banks to take more risk today. there is a parallel here with monetary policy. in their decisions today, people take into account how interest rates will be set tomorrow, just as banks when taking risks anticipate how central banks are likely to behave.

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