relied wholly on its standard corporate insolvency regime to handle the fall - out from a bankrupt bank. all speeches are available online at www. bankofengland. co. uk / speeches this required an insolvency practitioner to protect the interests of creditors as a whole. the public authorities had no means of directing the insolvency process to prioritise the protection of depositors, the continuation of the bank ’ s critical functions or wider financial stability concerns. there was no way to recapitalise a failing bank by bailing in its creditors. as a result, when faced with the failure of a bank of any size, the uk authorities had only a stark choice between a very disruptive insolvency, putting financial stability at risk, or a taxpayer bailout. the uk was not of course the only jurisdiction to discover in the financial crisis that it did not have an effective regime for dealing with the failure of banks. and, as we discovered when lehman brothers failed, the authorities in different jurisdictions had no preagreed means of coordinating with each other on how to deal with the sudden failure of a major cross - border bank. nor had they any confidence that the actions taken by authorities in another jurisdiction would align to their own national interest. with hindsight it is clear we had been lulled into a false sense of security. in britain, northern rock represented the first major run on a bank since the failure of overend gurney in 1866. unlike, for example, th the us, the uk had not experienced bank runs in the 20 century. banks in the uk had failed. but insolvency had generally been avoided by the bank of england twisting arms to ‘ encourage ’ other banks, to support a rescue ‘ lifeboat ’, as in the secondary banking crisis of 1973 or to take over the failing bank as with barings in 1995. the failure of bcci in 1991 did lead to a protracted and difficult insolvency. but the bank ’ s activities in the uk were not of a scale that posed risks to the uk financial system and economy the bank of england ’ s approach to bank failure, an approach shared by many central banks, was one of ‘ constructive ambiguity ’. the aim was to guard against moral hazard by maintaining uncertainty about whether a bank in trouble would get liquidity support with the threat of insolvency in the background. in the event the threat of insolvency proved neither credible nor

and with them confidence. trust is an altogether different animal. it is based on beliefs, not observable proofs. it is grounded in perceptions rather than evidence. it is as much a psychological state as a financial one. 10 a clean balance sheet might instil confidence, but it need not repair trust. because it is a moral judgement, repairing trust can be a slow and painstaking business. moral compasses take rather longer to self - correct than magnetic ones. this has implications for the path of recovery in the period ahead. historically, credit has tended to lag the recovery in output in the majority of recessions, especially financial recessions. during the previous three major recessions in the uk – in the 1970s, 1980s and 1990s – credit to business recovered slowly and in some cases only several years after the recovery in activity ( charts 8, 9 and 10 ). this is consistent with trust between financial institutions and their customers being slower to recover than confidence more generally. moreover, unlike the situation today, earlier recessions in the uk were not primarily the result of financial factors. international evidence suggests that financial recessions have tended on average to be both costlier and lengthier. 11 normal recessions have been associated with a recovery in output to its previous peak after around 3 ½ quarters. recovery to peak output following financial recessions has on average taken around 5 ½ quarters ( chart 11 ). like its predecessors, lack of confidence may have “ caused ” this time ’ s recession. but it is lack of trust – and hence credit – that may shape the recovery. based on past evidence, as the governor has noted recently, we might anticipate a protracted period of repair. repairing trust – the low road to reform so what might be needed, beyond time, to repair trust in the financial system? a raft of reforms to the financial system, nationally and internationally, is currently being assembled. these measures will aim to strengthen banks ’ financial resources, risk management practices and governance. they are about bringing regulatory rules into the 21st century. this is the high road to reform – for example, higher buffers of capital and liquidity and higher standards of risk management. if successful, these reforms will help cleanse bank balance sheets. it is an open question, however, whether these efforts will be sufficient to restore public trust in the financial system. one reason why regulation might not be the whole answer is that trust in financial regulation is itself one of the casualties of crisis.