We need to improve our ability to identify catalysts for potential crises, whether those catalysts manifest themselves in the form of asset price bubbles or reside elsewhere. Perhaps most critical among the challenges facing policymakers and lawmakers is how to ensure that we have a more effective regulatory structure going forward. This is a complex subject that I do not have time to do justice here tonight. However, I believe it is important to explain why the Federal Reserve’s monetary policy, lender of last resort and supervisory functions should remain in place. These functions are interrelated so that the execution of one of these responsibilities helps the Federal Reserve in its conduct of the others. For example, consider the Fed’s lender of last resort function. For the Fed to perform this role effectively, it is important that it have first-hand knowledge about banks, the capital markets, and payment and settlement systems. To perform this role safely, it must know its borrowers, which is why a supervisory role is essential. Put simply, if supervisory and other financial oversight responsibilities were taken from the Fed, it would make it more difficult for us to perform our lender of last resort function. To do that well and safely, it is important that we understand banks, the financial system and all its interconnections. One instructive example in this context is the Northern Rock experience in the United Kingdom, where banking supervision and the lender of last resort functions were separated.
At the risk of oversimplifying, Central Banks associated with – or responsible for – financial stability may find themselves with:   two separate missions: price and financial stability    two different accountability regimes: full independence for monetary policy; coordination or subordination mode for financial stability    two interacting sets of instruments: interest rates and macro prudential tools (a situation made even more complicated when unconventional monetary policies are implemented)  The potential for confusion is real. It is not difficult to imagine situations where actions that Central Banks take on pure monetary policy grounds are nevertheless contested in the name of financial stability. To some extent, this has always been a possibility. The difference, now, is that institutional frameworks exist through which – implicit or explicit – challenges to Central Banks operational independence can materialize. It might be tempting to conclude, then, that Central Banks should stay away from financial stability and concentrate exclusively on ensuring price stability. This, unfortunately, is impossible, if only for reasons that Charles Goodhart has well explained in a previous paper: ultimately, Central Banking is about providing liquidity and liquidity provision is an essential and central component of financial stability. What can we conclude?   First, central banking is not only about monetary policy but also involves an essential component of financial stability. This seems to me a broad consensus coming out of the crisis.