##b ’ s marginal lending facility in euros. handling potential liquidity pressures faced by lcfis operating in multiple countries and currencies continues to be a focus of policy attention. third, the uk authorities are improving the procedures and information needed to manage systemwide risks should they crystallise. the bank, the fsa and hmt now conduct regular crisis management exercises to develop the coordination needed to handle operational disruptions and financial crises. market - wide testing of business continuity arrangements takes place annually. it involved some 70 firms and utilities in 2005 and another test is about to start. finally, the changing financial landscape has increased the importance of international crisis cooperation. an mou to develop such coordination in the eu amongst central banks, finance ministries, and regulators has been established and tested. we need to build on that to reach beyond europe and to test crisis management arrangements especially with us authorities. taken together, these measures should help reduce the likelihood of systemic instability in the uk. i hope that my remarks today help make clear that the private sector – through sound individual and collective risk management – has its part to play in lengthening those odds still further. recent work at the bank has been exploring this issue. see, for example, the analysis in wells, s ( 2002 ), uk interbank exposures : systemic risk implications, financial stability review, december, pages 175 - 182, and cifuentes, r, ferrucci, g and h s shin ( 2005 ), liquidity risk and contagion, bank of england working paper no. 264. see tucker, p ( 2004 ), managing the central bank ’ s balance sheet : where monetary policy meets financial stability, lecture to mark the fifteenth anniversary of lombard street research, 28 july.

john gieve : financial system risks in the uk – issues and challenges speech by sir john gieve, deputy governor of the bank of england, at a centre for the study of financial innovation roundtable, london, 25 july 2006. * * * the bank and financial stability the bank of england ’ s central position in the economy owes a great deal to the development of its role in managing financial crises. the need for a central bank to provide liquidity to the market was identified as early as 1802, when henry thornton said : “ … if the bank of england, in future seasons of alarm, should be disposed to extend its discounts in a greater degree than heretofore, then the threatened calamity may be averted through the generosity of that institution. ” 1 it took until the 1870s for that role to be institutionalised. the arrangement to request a letter from the chancellor permitting the bank to issue notes not backed by gold at a time of crisis was important to the remarkable financial stability that ensued. indeed, some academics suggest that a true financial panic has not taken place in the uk since overend gurney & company collapsed in 1866. 2 of course a lot has changed since then but maintaining financial stability remains one of the bank ’ s two core purposes. the current institutional arrangements are spelt out in a memorandum of understanding ( mou ) between the bank, the treasury, and the fsa. it establishes a framework for cooperation on three joint responsibilities – first identifying risks to the stability of the uk financial system, second reducing the risks where we can, and third managing crises if they occur. the bank contributes to all three. • we bring to the assessment of risks both the expertise in economic analysis that we have developed as the monetary authority and the experience that gives us as a participant as well as an observer of financial markets. • we can help to reduce risks directly through our engagement with payment systems and by working with the fsa at home, and with other financial authorities abroad, to improve the resilience of the financial system. • as lender of last resort, we can contribute to the resolution of crises either by supplying liquidity to the market in general or, in rare circumstances, acting as the channel of support or facilitating transactions for individual institutions. the new mou makes plain that the decision to authorise support operations rests with the chancellor following independent advice from both the bank and the fsa. our concern is with the stability and resilience of the financial