growth due to the reallocation of resources in the economy remains weak. we can see this in the divergence of rates of returns across firms which remain remarkably and unusually high and the change in capital across sectors which has been particularly low. when the reallocation mechanism is working, the transfer of capital and labour from the less productive to the more productive pulls up the level of productivity in the economy and reduces the divergence between firms. the high degree of divergence between firms at present implies that this reallocation mechanism is working significantly less powerfully now than before the crisis. this can also be seen in the proportion of loss - making firms which stands at around 20 % higher than its long - run average. 2 company liquidations also remain low. so there is still more than a hint of ‘ zombiness ’ in the corporate sector. changes in 2002 to the hmrc ’ s preferred creditor status means that the proportion of loss - making firms might not return to its long - run average. bis central bankers ’ speeches the damage to the banking system has certainly played a large part in this. a wellfunctioning banking system is a key part of the reallocation mechanism. it allocates capital efficiently to its most productive use and matches risk to reward. a badly damaged one, recovering slowly from a period on life support does not play that role well. and the exceptional stance of monetary policy that has been necessary to cushion the fall of the economy and to provide the platform for recovery may also be part of the story here by reducing the pressure on poorly - performing firms. as an aside, i want to make a brief comment in the context of the other part of my job : financial stability. we know that recoveries from financial crises tend to be slow ; it takes on average about eight years to reach the pre - crisis level of real per capita income following financial crises. 3 distorted and damaged financial sectors don ’ t allocate resources effectively. we may not pay the price for a number of years as the boom builds up. but in the end the price we pay is large when a financial system misallocates resources in the boom and in the following bust. real gdp per head – the best measure of our aggregate living standard – remains 1 % below its pre - crisis peak. this high cost to the economy and to society is why we need not only robust regulation of financial institutions but also of the financial system as a whole. financial stability and

sam woods : adapting to solvency speech by mr sam woods, executive director of insurance supervision of the bank of england, to the association of british insurers, london, 9 july 2015. * * * it is a great pleasure to speak to you today. i plan to give another speech in a few months ’ time, focussed on the history of insurance regulation and supervision here in the uk. but today i will talk about my immediate priority, which is getting solvency ii over the line for go - live on 1 january 2016. the industry has made a tremendous effort to make the transition a successful one. the circumstances have been difficult, with a delay to political agreement on important aspects of the new regime compressing the time that the industry has had to prepare. the delay has also added to the costs of implementation. however, the time has not been wasted and firms have used it to make important improvements to their own risk and solvency assessments, as well as their internal model applications. today i want to make sure that investors and insurance firms understand the approach the bank of england will take to capital under solvency ii. first, i would like to bust two myths : • the idea that there is some kind of plan within the bank to use solvency ii to increase required capital across the insurance sector ; and • a suspicion that we will somehow keep the current ‘ icas ’ regime alive after 1 january 2016, rather than embracing the new regime. second, i want to make it absolutely clear that we will give firms plenty of time to adjust to the new regime, and that those firms who wish to make use of transitional measures will be given the freedom to do so. myth - busting i have heard from some a concern that we will use solvency ii to increase levels of capitalisation across the sector, or that we are seeking to load the sector with more capital now so that it is baked into the new regime once operational. let me state very simply : there is no such plan within the bank of england. the reason for this is also simple : we think that our current regime secures an appropriate level of capitalisation for the insurance sector and puts us in a good position to make the shift to solvency ii. the icas regime was introduced in 2004 as a response to the stock market falls and subsequent problems faced by uk firms in the early part of the decade. it is based on sound principles, such as market - consistent valuation of the balance sheet and a