That did not work in the past and is not the right response now. I am absolutely delighted that Hector Sants has agreed to remain at FSA and then move to the Bank to become the first chief executive of the new prudential regulator. In difficult circumstances, Hector has engineered major improvements to FSA’s prudential regulation. Andrew Bailey will head the Bank’s transition team and will be the first deputy chief executive of the prudential authority. Together, Hector and Andrew form the perfect partnership to make the transition work and create the new organisation. In the new regime, regulation will reflect two different, though complementary, perspectives. The first, as now, is a bottom-up perspective, focused on setting institution-specific capital requirements. Those would be fixed requirements that banks could not breach. The second is an overall perspective with a set of system-wide capital requirements that vary over the economic cycle. Judgements on the level of these capital buffers will be part of the remit of the new Financial Policy Committee. The prudential regulator, with its micro prudential responsibilities, and the Financial Policy Committee, with its macro prudential responsibilities, will need to work closely together, and that is one reason why it is sensible that they are both in the central bank. It is not difficult to see what role such a macro prudential regime might have played in the run-up to the crisis. A progressive tightening of capital standards, for example, would have helped rein in the near-tripling of UK bank balance sheets between 2002 and 2007.

Second, we have seen a steady decrease in dependency ratios, which has stimulated excess savings and therefore lowered the equilibrium rate. This trend, too, will reverse soon, as the increase in the share of the elderly population will outpace all other population groups. Dependency ratios around the world will rise, which will buoy the equilibrium rate. Third, inequality has risen in past decades, again adding to the increase in the mean savings rate. But note that we are now observing a decrease in (at least) wage inequality in many countries, including the Czech Republic. Inequality, broadly defined, has decreased in most countries around the world since the crisis (World Bank, 2016). I believe that the discussion on inequality tends to be overly pessimistic. Fourth, more and more developing countries have been getting fully integrated into the world economy, releasing their supply of savings into global markets and giving rise to the notion of a “savings glut”. I see no reversal here, which means that this factor will continue to depress the equilibrium real rate of interest. Fifth, the relative price of capital goods has been decreasing. In consequence, capital has become cheaper relative to labor. This is reducing the total demand for capital (when counted in nominal terms) and thus lowering the equilibrium rate. Again, this trend is likely to continue. Sixth, we have witnessed a preference shift away from infrastructure projects, which is again reducing the demand for capital. In many countries, environmental regulations have made it difficult to invest in infrastructure.