we were, however, pressed to do more than our routine job and to lend in exchange for other collateral, including the financial assets for which the markets had virtually closed. banks, in particular, said they wanted us to help them turn illiquid assets into cash. as i told the house of commons treasury committee on 20 september, we were cautious about doing this. the case for caution is, in the jargon, moral hazard. put simply, such action by us encourages the very risk - taking that caused the present problems. it is crucial that, in making their lending and borrowing decisions, banks face the right incentives. that is why we did offer to lend in exchange for illiquid assets but only at a penalty rate of interest. support on the scale required by northern rock would have been difficult to undertake without it becoming “ stigmatised ” – regardless of the method adopted. the only way to avoid that would have been to offer to lend to all banks at a rate that many others – in addition to northern rock – found attractive to pay. and to do that without drawing attention to northern rock ’ s take - up would have required a truly massive injection of cash into the banking system. that could happen only if there were no penalty rate or if conditions in money markets generally were difficult enough to make the penalty rate attractive to many banks over a prolonged period. nothing would have been easier than for the bank of england to lend freely without a penalty rate. almost every actor in this drama saw advantage in cheap money and plenty of it. the role of the central bank is to ensure that the appropriate incentives are in place to discourage excessive risk - taking and the under - pricing of risk, and in so doing to avoid sowing the seeds of an even greater crisis in future. that we have done in each action we have taken – by maintaining the principle of the penalty rate. some commentators have taken issue with these concerns about moral hazard, arguing, by analogy, that fire departments put out fires started by people who smoke in bed. i agree that we have fire services to do precisely that. and if a fire starts in the financial system, the central bank will put it out if it threatens to spread. but fire services do not offer free insurance for people who smoke in bed or set fire to their own house, thereby encouraging them to take risks that endanger others. when it became clear that northern rock could not find funding elsewhere, it came to the tripartite authorities (

power periodically to flesh out the statutory objective, via a remit from the chancellor of the exchequer – an arrangement that has worked well in the monetary field in the uk. it will enable practical lessons to be incorporated into the regime over time. why is the uk ’ s macroprudential body separate from microsupervision? most central banks have traditionally regarded their contribution to financial stability as deriving from their markets and banking supervision functions. that is explicit in the federal reserve ’ s 1913 statute, with which i began these remarks. and given the uk ’ s heavily concentrated banking system, effective banking supervision is obviously an essential precondition for preserving stability. but in terms of how organisations work in the real world, the flaw in relying entirely on this is that it assumes that those operational areas of the central bank will invariably make time and space to address the financial system as a system. bis central bankers ’ speeches incentives work in the opposite direction. nearly all the bank supervisors i have known over the past three decades have invariably been drawn towards the parts of their inbox about individual firms, for the simple reason that that is where their individual accountability is starkest. at its heart, the fpc is a device to overcome this problem. it charges a group of policymakers to step aside from the fray, resisting myopia and synthesising the perspectives of supervision, securities regulation, market operations and macroeconomics, with the goal of identifying and addressing the big developments that could jeopardise stability. lest it be doubted, that task will, of course, be unachievable without a suitable flow of information from the bank supervisors ( and the securities regulators ) to the fpc and its staff in the bank. the fpc ’ s instruments will not be aimed at individual firms per se. but we are expecting that the committee will be briefed by hector sants ’ supervisory team on the circumstances of the most significant firms, and to be informed routinely about shifts in the supervisors ’ ratings of firms generally. symmetrically, the fpc ’ s concerns will surely help the efforts of the microsupervisors. in particular, the macro perspective can make a big contribution to the design of stress tests of firms ’ soundness, whether “ top down ” stress tests conducted for the fpc itself or “ bottom up ” stress tests conducted as part of micro supervision. and the markets perspective can help to identify issues or types of firm that warrant closer examination. we need to make that