And the Treasury Select Committee of the House of Commons regularly summons me and other members of the Monetary Policy Committee to give evidence on the basis of these reports. Finally, the Government has made it a requirement that, if we miss the target of 2.5% by 1% or more in either direction, the Committee must write an open letter to the Chancellor, explaining why, how long we expect to stay adrift from the target, and what we intend to do about it. These arrangements, taken together, provide a framework of transparency and accountability that, as far as I am aware, goes far beyond anything which applies anywhere else in the world. Public understanding of what we are trying to do and why - even understanding that the conduct of monetary policy is not a precise science but rather a matter of balancing risks - is crucial to our success. And transparency and public understanding should - by influencing public expectations - reduce the costs of maintaining low inflation. But, of course, you need broad shoulders. As you know the minutes of our January meeting - published a fortnight ago - revealed that the MPC was for the first time divided in its policy decision. That inevitably led to an excited and over-simple categorisation of BIS Review 18/1998  -5-  individual members of the Committee as either hawks or doves.
In the case of LTCM, stress testing could have given banks at least some warning of the types of exposures they could have faced last fall. The critical importance of stress testing is noted very explicitly in our new supervisory guidance. Sound Practice Guidance The sound practices document accompanying the Basle report presents an important set of standards that will guide both banks and their supervisors. It appears that banks generally have tightened the credit risk management standards for their HLI exposures since the collapse of LTCM. However, it is important that supervisors try to ensure that progress continues. Memories tend to be short, and we want to make sure that as markets calm down, as they have in the past months, banks do not return to the old ways of doing business. The adoption and rigorous enforcement of enhanced risk management practices should contribute substantially to limiting excessive risk-taking and leverage at HLIs. This is the case because HLIs cannot trade without access to financing and liquidity from banks and securities  3  BIS Review 27/1999  firms. If each counterparty manages its risks appropriately, the chance of contagion to other institutions and the financial markets more broadly would be reduced substantially. It is this risk of contagion and financial market instability that is the principal concern of central banks and supervisors. Along with other federal banking supervisors, the Federal Reserve has moved quickly to implement the recommendations of the Basle Committee’ s report.