We take all of our responsibilities very seriously, as of course we should. Across the board, there have been developments over the last year that give me a sense of cautious satisfaction – by the way, that is at the happier end of the spectrum of emotions for a central banker Seriously, I am afraid that we must not get carried away here. We are in many ways in the second phase of the financial crisis. The first phase was a prudential one, while the second phase has revealed past misconduct. Fixing the financial system requires more than just fixing capital and liquidity standards. Standards of governance, conduct and the right incentives structures are all extremely important. After commenting on two material development this year I want to use the rest of my time to set out four areas where we are either taking action, or watching very carefully to determine whether action may be required. Let me start by describing two developments which point to some cautious satisfaction. First, the capital position of UK banks has strengthened. Market conditions have supported actions to raise capital and reduce non-core assets, and banks have taken advantage of those conditions. The targets that were set as a consequence of the FPC and PRA exercise of nearly two years ago have been met ahead of schedule. The banking system is now more able to support lending and the growth of the economy.
Toward the end of the year, we will publish the results of our first round of simultaneous across major UK banks stress tests, which will follow the publication by the European Banking Authority of its stress tests in just over a week from now. Our stress tests are a real step in the direction towards the full use of such tests as one of the three pillars of the capital framework. This is a major development compared to the cumbersome and slow process of stress testing one bank after another that we developed during and after the height of the crisis. We will be using these tests to assess whether firms have capital positions and capital plans looking forwards which will provide re-assurance that they will be safe and sound under stressed conditions, as the name suggests. If they don’t – and you should take no inference on the results from what I say here – we will ask them to look again at their plans. Stress tests should not be a dramatic event, they should be part of the health check and they should prompt measured responses where necessary, and reflecting the fact that at different speeds banks are heading out of the crisis. Last on capital is the issue of loss absorbency in going and gone concern states. For the major banks this is the too big to fail problem.