Alongside that evidence, we could see that the sum of the projections for lending in the two years ahead for the UK banks was substantially negative. The case for acting was therefore strong, but the challenge was also that in its first year, success for the FLS was in some ways to prevent the most negative outcome for lending, which in an absolute sense would not look great. What we have seen over the last year is quite a substantial change in the funding costs of banks which has fed through into lower lending costs, but more so in terms of the amount of lending in the mortgage market than for small firms. Funding for the major banks have also become less disposed, which has probably increased the willingness of banks to compete on lending. But the uneven pattern of lending meant that we thought it was sensible to increase the incentives for banks to lend to small firms. We cannot say that this will conclusively deal with the question of whether the problem is a lack of loan supply or demand, but we can say that we have used our toolkit to create a big incentive for banks to lend to small firms. In summary, there is a strong public interest in the banks, which has been sharpened by the crisis. One element of that public interest is permanent – the role of banks in supporting the real economy.
The crisis has been a searing experience for banks and regulators, precisely because at times they have both failed to fulfil this central objective of maintaining safety and soundness and hence the continuous supply of critical services to the public. For what is now not far short of three years we have been working to change the approach to financial regulation in the UK. We are still working to do that of course, but the difference is that for the last four and half weeks we have been doing so within the new regulatory framework of regulation – we are doing it now as the Prudential Regulation Authority and the Financial Conduct Authority. The prompt for this change of approach has been the severity of the financial crisis, a crisis that has been through a searing phase of prudential problems – failing banks – and more recently a conduct phase as the misdeeds and unacceptable behaviours of the past have been revealed. On a personal note, recently when my appointment was announced, I was described a number of times as a veteran of the Bank of England. It was for me a moment of home truth; 28 years is quite a long time in one place, even if the term veteran sits uncomfortably. But it reminded me that the UK is on its fourth system of financial regulation during that time.