##udential 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. the bank ’ s sermons on the storms ahead would have had more influence if at the same time a collection plate was passed round the congregation so that money was available in the event that the church roof had to be replaced. but a macro prudential regime also has a key role to play in the downswing phase of the cycle. since 2008, credit conditions have tightened, jeopardising the recovery and, in turn, threatening renewed losses for banks. by allowing banks to draw on their macro prudential capital buffers, while credit conditions remain tight, the system is counter - cyclical. in other words, a credible macro prudential regime could help forestall both excessive exuberance and unnecessary caution. by altering the pressure on the financial brakes according to circumstances, regulation, far from being an inflexible foe, would become a flexible friend. this type of regulatory regime, and its objectives and tools, are largely untried and untested. but that is not a reason for not trying and not testing. the financial policy committee will be a first. over the next few years we will put

small, take responsibility for understanding and mitigating the risks in their business and be able to demonstrate to us that they are doing this. i realise that the parliamentary commission chaired by andrew tyrie was about banks and their record. but it raised an important theme that has to be considered more widely, namely that our approach to supervision of firms ensures that senior individuals are properly accountable and thus incentivised. the record of the banking crisis indicates that this senior accountability was not effective in banks that failed. often, the simplest points are the most powerful, and complexity is a poor guide. andrew tyrie and his colleagues have done a great service by making a simple but powerful bis central bankers ’ speeches point – as supervisors we must incentivise and hold to account those at the top, and not seek to do the job of management by influencing excessively further down. i could not end without talking about europe and solvency ii and wider global developments in insurance regulation. a month or two ago i ruffled a few feathers by criticising the cost and time taken preparing for a european directive that isn ’ t finalised. i have no regrets, because as public officials we have to speak honestly and transparently. i was making a point on behalf of firms because i feel strongly that you have been put to too much expense and time spent by management and boards. but, in saying this, i should be clear that the pra has not withdrawn from involvement in solvency ii, far from it. as tidjane said this morning, the insurance industry and its regulators cannot operate in a vacuum. this is why we continue to invest a large amount of our time engaging with our counterparts in europe as well as with the european supervisory authorities, the esas. we liaise closely with eiopa, the european insurance and occupational pensions authority. julian adams sits on the eiopa board of supervisors and management board and this gives us an opportunity to participate at a european level. a few weeks ago, eiopa reported on the critical issue of the long - term guarantees assessment and closed its consultation on proposals for preparatory guidelines. we now have acceptance that the classic matching adjustment is a prudent measure, which is hugely important for the uk life insurance industry. we know that many of you still have concerns around the restrictions built into the classic matching adjustment, particularly around the assets that can be used and the effect of possible downgrades in portfolios which are held for the long