Although far from clear at the time, the later decision to remove from the Bank of England the power to regulate banks would return to haunt us. Over the next decade, the new Monetary Policy Committee established a track record of low and remarkably stable inflation. In my first speech as Governor in 2003, I warned that this stability was unlikely to continue. And it didn’t. Within a few years, and despite low inflation, the advanced economies of the world were plunged into a financial crisis which led to the sharpest decline in world trade since the 1930s, recessions across the world, rising unemployment and the near collapse of our banking system. BIS central bankers’ speeches  1  So tonight I want to try to answer three questions. First, what went wrong? Second, what are the lessons? Third, what needs to change? Let me start by pointing out what did not go wrong. In the five years before the onset of the crisis, across the industrialised world growth was steady and both unemployment and inflation were low and stable. Whether in this country, the United States or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom. So what was the problem? In a nutshell, our banking and financial system overextended itself. That left it fragile and vulnerable to a sudden loss of confidence. The most obvious symptom was that banks were lending too much.
Last autumn, the Independent Commission on Banking, chaired by Sir John Vickers and comprising some of our most brilliant bankers and economists, published recommendations on how to do this. It’s vital that Parliament legislates to enact these proposals sooner rather than later. Regulation, resolution and restructuring of the banks are the three Rs of a new approach to make banking, and so our economy, safer. The three Rs will be central to the work of the Bank of England. And all of that will come on top of our responsibility for monetary policy to reduce inflation while supporting a gradual recovery of our battered economy. It’s the biggest challenge the Bank has faced for decades. 4  BIS central bankers’ speeches  We are up to the task. Already we see vested interests rise up to defend their bonuses and profits. But, as an independent central bank with over three centuries of history, we can resist those short-term pressures and take the longer view needed to prevent another crisis. Independence is, however, not the discretion to do as you wish, but the exercise of specific powers delegated to us by Parliament to meet a remit set by Parliament. So with independence come the responsibilities of transparency and accountability. Back in 1997, with independence to set interest rates, we revolutionised the openness of monetary policy. Our decisions, deliberations and even the disagreements within the Monetary Policy Committee are open to public scrutiny.