of its approach to resolution. this document – known by the colour of its cover as the purple book - was first published in october 2014. its purpose is to set out very clearly the options that the bank has to deal with a failure of a bank and the way in which we would use our powers. explaining how resolution is designed to work in practice and what is needed to remove barriers to resolvability are necessary steps to ensure that resolution regimes are credible. all speeches are available online at www. bankofengland. co. uk / speeches the purple book illustrates the scale of progress that has been made in the uk towards putting in place a credible and effective way of dealing with bank failures. i would pick out three crucial areas of reform : first, there is now a comprehensive statutory framework to deal with failing banks, for which the bank of england is formally responsible. we have statutory powers to match this responsibility and there are a wide range of options available to us. unlike in 2008, there, is now a special bank insolvency procedure which requires that the insolvency practitioner prioritise pay - out of insured depositors or the speedy transfer of these deposits to a purchaser. eligible depositors are protected up to £85, 000. ‘ co - insurance ’ has been consigned to history. for the large number of small building societies and banks, this procedure should mean that their failure can be managed and their depositors paid out or transferred quickly following entry into insolvency – leaving shareholders and creditors to take the losses. but the larger banks that hold the majority of deposits in the uk provide critical functions for the economy. these would be disrupted by insolvency, even in the new regime. were a large bank to fail, the bank of england can now trigger the use of ‘ stabilisation ’ powers outside insolvency. these powers include ‘ bail - in ’ to recapitalise the bank by imposing losses on shareholders and creditors, so that its critical operations can continue. this provides time for the firm to be safely restructured to address the causes of failure. second, we are well on the way to ensuring that if a bank fails and is taken into resolution, there will be sufficient, private sector, financial resources, in the form of debt and equity, that can be bailed in to absorb losses and recapitalise the bank so that it can continue to operate. to achieve this the bank has

effective. when northern rock got into trouble with £23bn in customer deposits and a balance sheet of £100bn, the uk financial authorities were left with no way of rapidly transferring parts of the failed bank ’ s business to another bank ; or of recapitalising the bank by imposing losses on shareholders and creditors without serious risks to financial stability. all speeches are available online at www. bankofengland. co. uk / speeches and so, on 17 september 2007, the chancellor was compelled to guarantee all northern rock deposits. subsequently the bank was nationalised to avoid insolvency and to allow the bank ’ s critical functions to continue while a buyer was found for its deposits. the lessons of northern rock were dramatically underscored a year later by the failure of rbs and lloyds. faced again with the choice of insolvency or taxpayer intervention, the government was forced to inject £37bn into the two banks. the banks were not put into insolvency and it proved impossible fully to write down the existing shareholders or impose losses on the bond holders. the first lesson from this was that constructive ambiguity simply didn ’ t work. the market had always suspected this to be the case. the implicit subsidy enjoyed by the largest banks before the crisis illustrated the market ’ s assumption that the state would always intervene to prevent their bankruptcy. and the market was generally proved right. the exception that proved the rule was the fed ’ s decision to let lehman brothers enter insolvency. the fallout globally from lehmans demonstrated dramatically, why, for large banks that perform critical functions, insolvency is not a viable option. the second lesson, which follows from the first, was that if we want, when a bank fails, to have better options than a disruptive insolvency or a taxpayer bailout, those options have to be put in place well beforehand. doing so comes at a cost to banks and to public authorities. but if at the point of failure, there are no better options than were available in 2008, moral hazard cannot be avoided. rather than constructive ambiguity, we need credible clarity that when a bank gets into trouble, the losses will be made to fall on shareholders and creditors and not the taxpayer. and if the bank provides critical services to the economy, that these can continue while the bank is resolved in an orderly way. the purple book it is in order to achieve such credible clarity, that next week the bank will publish an update