Chart 6: Market capitalisation to book-value of total assets 14.0% 12.0% 10.0% 8.0% 6.0% 'No crisis' banks 'Crisis' banks 5% threshold Lehman failure 15 Sep 08  4.0% 2.0%  Nov 08  May 08  Nov 07  May 07  Nov 06  May 06  Nov 05  May 05  Nov 04  May 04  Nov 03  May 03  Nov 02  May 02  0.0%  Sources: Capital IQ and Bank calculations (a) 30-day moving average of market capitalisation Other Footnotes as per chart 5  14  BIS central bankers’ speeches  Chart 7: Market capitalisation to book-value of debt 15.0% 12.5% 10.0% 7.5% 5.0% 'No crisis' banks 'Crisis' banks 5% threshold Lehman failure 15 Sep 08  2.5%  Nov 08  May 08  Nov 07  May 07  Nov 06  May 06  Nov 05  Nov 04  May 05  May 04  Nov 03  May 03  Nov 02  May 02  0.0%  Sources: Capital IQ and Bank calculations (a) 30-day moving average of market capitalisation Other Footnotes as per chart 5  Chart 8: Market capitalisation to book-value of equity 2.50 2.00 1.50 1.00  'No crisis' banks 'Crisis' banks 1.20 threshold Lehman failure 15 Sep 08  0.50  Nov 08  May 08  Nov 07  May 07  Nov 06  May 06  Nov 05  May 05  Nov 04  May 04  Nov 03  May 03  Nov 02  May 02  0.00  Sources: Capital IQ and Bank calculations (a) 30-day moving average of market capitalisation Other Footnotes as per chart 5  BIS central bankers’ speeches  15  Chart 9: Optimal capital structure – Debt and Equity  Optimal capital structure – D + E  Present value of costs  Expected costs of financial distress  Expected taxes  Optimal leverage ratio  Debt/Equity  Source: Bank of England  Chart 10: Optimal capital structure – Debt, Equity and Contingent Capital  Optimal capital structure – C + D + E  Present value  Expected taxes  Expected bankruptcy costs Taxes paid due to existing equity 0  Optimal portion of convertible debt  100%  Source: Bank of England  16  BIS central bankers’ speeches  Chart 11: Major UK banks’ Tier 1 capital ratio % 12  Including bonuses paid as cocos Including dividends paid as cocos  11  Actual Tier 1 capital ratio  10 9 8 7 6 2000 2001 2002 2003 2004 2005 2006 2007 Sources: Annual accounts and Bank calculations (a) Alliance and Leicester, Banco Santander, Barclays, Bradford & Bingley, HBOS, HSBC, Lloyds TSB, Nationwide, Northern Rock and RBS.

Few would disagree with the following: The bad behavior that contributed to the Financial Crisis was evidence of a culture that was not strongly ethical. Let me also pose a challenge to those who are skeptical about the benefits of a strong ethical culture: If this is not a suitable method to prevent bad behavior by bankers, what alternative proposal do you advocate? The status quo is not acceptable. As a wise man once said, “Plan beats no plan.” The components of a strong ethical culture So what are the key components of a strong ethical culture? It is said that lawyers love a metaphor, and this lawyer is no exception. I like to think about ethical culture as if it were a package. The culture that we will have is derivative of what we put into the package, and there are clear choices to be made. The contents depend upon the type of organization, the kinds of people, and the nature of the skills needed to conduct the organization’s activities. Time will not permit me to cover this thoroughly, so let me cover a few items with a very broad brush. What goes in For starters, the conduct of the people in any organization will be strongly influenced by incentives. Let me mention the “big three.” Bankers, like lawyers, want to do [1] quality work, [2] with people they like and respect, and [3] receive fair recognition in return.