itself was constrained by the fact that price stability was not explicitly targeted and by his belief that there was no consensus on this in italy. he was convinced that a monetary rule, however necessary and well formulated, could not replace discipline in the decisions and conduct of society as a whole and that it had to follow, and not precede, the adoption of such discipline. according to the expression used in the concluding remarks of the annual report for 1975, monetary management in those years was “ coming to resemble an economy under siege ”. at the beginning of 1976, after political, business, trade union and academic pressure had led to an easing of liquidity conditions, the low level of the official reserves and the opening of a government crisis triggered a violent attack against the lira, the presages of which had been underestimated up to the end of the previous year, and led to the closing of the foreign exchange market for forty days. the turbulence on foreign exchange markets continued during the year with ups and downs and a succession of restrictive measures that included exchange and credit controls, the reintroduction of the ceiling on loans, an increase in compulsory reserves and rises in the discount rate for a total of nine points. these steps were effective in bringing the external balance back into equilibrium, replenishing the official reserves and repaying foreign loans. the exchange rate fell by about one third ; inflation rose to 23 per cent and then slowed to about 12 per cent. recourse to administrative credit and foreign exchange measures was not avoided. contemporary documents confirm that baffi was against using administrative controls but also show that he was convinced their use could not be ruled out given the influence exerted by the state of the market. late in 1978, the dramatic year that saw the kidnapping and assassination of aldo moro and the killing of his escort, negotiations began for italy ’ s membership of the european exchange rate mechanism. not a few considered acceptance of the external constraint as providing powerful support in curbing the factors − rents, wages and public expenditure − that prevented italy from definitively overcoming an emergency that had lasted too long not to threaten the stability of the country ’ s institutions. baffi ’ s position was cautious : he recognized that belonging to the european monetary system could help to bring down inflation, but he believed that this should be the result of agreement on domestic policies and that a start should be made before entering into the exchange rate commitment. during the negotiations baffi advocated a system with a broad fluctuation

. but it is certainly the most effective means of financial resource allocation that we have so far discovered. the challenge is to make it work more effectively – more efficiently, both in terms of intermediation costs, and crucially in terms of the direction of the flow of resources – but also more reliably and securely for both savers and borrowers. this is largely down to financial markets themselves. but it is a challenge, too, for the financial authorities who need to balance the need for market competition with the maintenance of minimum prudential and business behavioural standards by individual financial institutions, and the need to preserve overall macro - level financial stability. how far we are succeeding in meeting this challenge is, to my mind, the essential criterion against which we should seek to assess the development of our financial systems. against that background let me now try to identify some of the main drivers of change that have been, and are, affecting all our financial systems to varying degrees. the first is financial deregulation, that is to say the relaxation of controls designed to override market forces in either an overall macro - economic or a directional sense. in the case of the uk this extends back very importantly to the abolition of exchange controls and direct controls over bank lending over twenty years ago, to enabling building societies ( our principal mortgage providers ) to extend their range of financial services activities, to the opening up of membership of the stock exchange and broader capital market intermediation and so on. deregulation in this sense was both encouraged by, and in turn contributed to, increasingly intense competition within the financial services industry, including a blurring of traditional distinctions between different types of financial institution. they were accompanied by what i think of as " re - regulation " that is to say more formal and structured regulation of both the prudential behaviour and standards of conduct of virtually all financial services activity targeted more specifically at both institutional stability and consumer protection but, subject to that, leaving the market to do its job. such regulation in the uk has now been consolidated in a single, over - arching, financial services regulator, the fsa ( financial services authority ). the bank of england remains responsible for macro - prudential oversight, that is to say the stability of the financial system as a whole, including oversight of payments systems. but we are no longer responsible for prudential banking supervision at the micro - level. the re - regulation process, of course, conforms with the access provisions of