Our respective roles and responsibilities, including in a crisis, are set out in a formal Memorandum of Understanding published in the Autumn of 1997 between the Treasury, Bank of England, and FSA. The MOU also established a Tripartite Standing Committee that meets monthly to exchange information and discuss current threats to financial stability. I like to think that, with the departure of responsibility for day-to-day supervision of individual institutions, the Bank has addressed the issue of systemic stability with a new-found clarity of purpose. That said, we know that there is a huge amount of work still to be done on understanding systemic risk. I see a clear contrast here with the monetary policy field. In monetary policy, we are closer to a general consensus about the policy framework and the objectives of monetary policy, even if at any moment of time uncertainty still surrounds our forecast for inflation and the appropriate policy response. Certainly the UK target for monetary stability (the 2.5% symmetrical inflation target) is clear and transparent. In the field of systemic stability and financial crisis, however, our understanding is at a very preliminary stage. We face an array of fundamental questions: how to define systemic stability; how to measure and predict it; what policy weapons we should employ to achieve it; what the costs are if we fail; and how best to resolve instability if it occurs. We have only partial answers to these questions.
Market discipline through enhanced disclosure does of course form one of the pillars of the new Basel Accord but there are also broader international initiatives underway on this front. What I would like to do is spend a little time here discussing how increased public disclosure, and certain other aspects of the new Basel Accord, could affect financial efficiency and financial stability. Is it possible to achieve advances in both? Enhanced disclosure Clearly the architects of these initiatives believe so. Increased disclosure should help the market distinguish between well-managed and adequately capitalised banks and their poorly managed and unsound counterparts. The latter will as a result come under pressure to improve their performance. This should produce clear financial stability benefits, and also financial efficiency ones, since the weaker banks are likely to be those who in some sense misdirect, or rather mis-price, credit to borrowers. Greater disclosure should also help to address the propensity in financial markets for self-fulfilling crisis. By this I mean, the tendency as conditions deteriorate and confidence is dispelled for market participants to act in a way that precipitates crisis for firms that would otherwise be solvent. The greater the uncertainty the more participants will be liable to trigger a crisis in this way. Increased disclosure has a part to play in reducing this risk. But it also explains the importance that we attach to liquidity management and the need to ensure that, given the current focus on the new Basel Accord, the regulation of liquidity is not overlooked.