Mervyn King: Banking and the Bank of England Speech by Mr Mervyn King, Governor of the Bank of England, to the British Bankers Association, London, Tuesday 10 June 2008. *  *  *  After a decade or more of economic stability, we are now facing a period of rising inflation and falling economic growth. Part of the reason for this change of economic weather is that we are passing through the most prolonged period of financial turmoil that most of us can remember. Whether, as the IMF has argued, it is the worst period of financial stress since the 1930s is too early to judge. After all, the crisis is not yet over. Since last August there has been a great deal of soul-searching about what we all might have done differently, both before and after 9 August when the crisis hit. And in circumstances where livelihoods are at risk it was inevitable that the “blame game” was played. Unfortunately, although such a game helped to fill newspaper columns, it generated more heat than light. So today I want to step back. Financial crises have been a regular, and disturbing, feature of our and other developed economies for as long any one can remember. They are as frequent now as in the nineteenth century, when Henry Thornton and Walter Bagehot were developing their ideas about how central banks could prevent instability in the banking system.
That is why requiring financial institutions to hold more capital to act as a shock absorber, while reducing the procyclical nature of existing capital requirements, may offer a balance between excessively burdensome regulation and excessive risk-taking. 4  BIS Review 75/2008  The proposals in the Banking Bill, and the other changes I have discussed today, will take us an important step forward in the creation of a framework for financial stability. But they will not be the final answer to a difficult, at times seemingly intractable, problem of how to change the incentives of both private and public actors to reduce the frequency and cost of financial crises. For that we will all need to do a lot more thinking. It is important that we do find the right solution. An efficient and thriving banking sector which can intermediate saving and investment, both domestically and internationally, is essential to our economic prosperity. BIS Review 75/2008  5