We cannot, and should not aspire to a zero-risk solution, but we do need to be prepared to take measures to restore confidence if things do go wrong. 11. Public policy response - process  The first area of public policy response concerns how we handle our day to day activities. These have to be sharpened and broadened to oversee this more complex environment: a real life challenge for all of us here in London. Given our position as a major international financial centre the stability of the system could be impacted by any significant storms from elsewhere. 6  BIS Review 5/2004  Perhaps I can say a few words about what this means to us at the Bank of England. Responsibility for the overall stability of the financial system as a whole means we undertake activities ranging from behavioural research to oversight of payment and settlement systems; from involvement in standard setting to implementing infrastructural change. To do this efficiently means, as our Governor Mervyn King recently reminded us, that we have to see the wood for the trees. The challenge is where you draw the line. This entails a prioritisation process to decide on the extent and degree of potential threats - and also a “sunset” approach where we subject each area of work to regular review to assess progress and continued relevance. There are a number of, interconnected, areas of work.
But in view of persistently low external interest rates, such a policy would likely have resulted in a sharp appreciation of the Norwegian krone, and inflation and activity in the Norwegian economy would have fallen to too low a level. The weak external environment is thereby also contributing to keeping Norwegian interest rates low. With firmly anchored inflation expectations, Norges Bank can today give weight to stabilising economic developments when setting the interest rate. Inflation targeting has become more flexible. We have chosen to take a long-term approach to bringing inflation back up. But we will not lose sight of the inflation target. Should the outlook for inflation or growth weaken considerably, there will still be room for manoeuvre to counteract such developments through monetary policy. Monetary policy in the light of new banking sector regulation The financial crisis taught us some important lessons. First, the crisis illustrated that low and stable inflation is not sufficient to ensure financial stability. Second, the crisis clearly revealed shortcomings in the regulatory framework for banks. As a result, banking and financial regulation is now undergoing change worldwide. Regulation and supervision are the authorities’ most important instruments to prevent financial instability. In March, the Government presented a legislative proposal on new capital adequacy requirements for banks. The proposal is in line with the EU’s new regulatory framework. A key element in the new framework is capital buffers that banks will be required to hold in addition to the minimum requirement. This will increase banks’ loss-absorbing capacity.