tight credit conditions. many of you must have worried at times about the safety of your cash balances and other liquid investments. you will have wondered about the soundness of the counterparties you use in the capital markets. and, for the past couple of years, you and your representatives at the act have also had to grapple with the array of regulatory reforms reshaping the financial system, internationally and domestically. it is clear that credit conditions prior to the crisis were unsustainably loose – reliant upon a financial system whose net worth was too low and which was overly dependent on flighty short - term wholesale funding. banks of all kinds are themselves having to repair their balance sheets and adjust their business models. they face headwinds in doing so. first, legacy portfolios – bad and impaired loans – act as a drag on profitability. in the uk, that particularly affects the two big banks directly rescued by the government. that matters a lot because they were particularly significant in uk business banking before the crisis, holding just under half of the stock of such loans. second, the lingering threat of some kind of bis central bankers ’ speeches implosion in the euro area has led to elevated funding costs for banks. the longer that persists, the more it will be passed on to bank customers. in the uk, the government has introduced a scheme to reduce bank funding costs provided they are passed on to sme borrowers. and on the continent, where the position is more precarious, the ecb ’ s long - term repo operations have broadly similar effects, giving banks there time to restructure their liabilities and so leaning against the risk of a sharp contraction in the supply of credit. this environment is affecting firms in very different ways. some companies find themselves with little need for external funds, and so are relatively insulated from tight credit conditions. indeed, the corporate sector as a whole is currently running an unusually large cash surplus, despite challenging demand conditions. a notable example is energy extraction. uk oil companies have run a large cash surplus – amounting to 1 - 2 % of gdp – for much of the past decade. this accounts for around half of the overall corporate cash surplus over the period. but it ’ s not just oil companies. the manufacturing sector as a whole is currently a net lender to the uk banking sector : it has more cash on deposit than funds borrowed. other sectors look to have less healthy cashflow positions in aggregate

. if one thing is clear from that brief and incomplete survey, it is that, sadly, the repair of the credit system will take time. stopping this happening again : the financial policy committee so will the even broader task of putting in place better “ rules of the game ” for the financial system. for all the measures in train internationally on banks ’ capital, resolution regimes, over - the - counter derivative markets, central counterparties, shadow banking and so on, they will i fear eventually be found wanting. conditions change. one generation ’ s reforms are eventually overtaken by the evolution of the structure of the financial system or by temporary bursts of misplaced exuberance. at its simplest, that is why the government has established the bank of england ’ s new financial policy committee – to ensure that the moment when the financial system ’ s resilience is critically impaired does not get overlooked ; that it is anticipated and appropriate action is taken. a standing body, meeting regularly, transparently, and backed by powers to take decisions on regulatory measures – the fpc is the body charged with being on the case. it won ’ t be perfect, but it can be much better than the pre - crisis regulatory regime. the initiative to create the fpc is necessary, because both macroeconomic policymakers and financial regulators have had to learn some tough lessons. on the one hand, we all need to be attentive to the effects that easy monetary policy globally can have on risk - taking behaviour. on the other hand, financial regulators cannot afford to focus exclusively on the health of individual banks and dealers as though they were isolated atoms. the financial sector is a system that hangs or falls together. moreover, it is swings of exuberance and caution that drive excessive fluctuations in the supply of credit to firms and households. the fpc is about filling the space between monetary policy and microregulation – in an admittedly inelegant phrase, “ macroprudential ” policy : policy that is focused on the resilience of the system as a whole. bis central bankers ’ speeches the fpc will not be a talking shop. it will have powers. at times, this will affect you directly. we have advised the government that, alongside controls over banks ’ leverage and risk - weighted capital requirements, the fpc should have the power to make the banking sector ( and other financial intermediaries ) hold more capital temporarily against exposures to sectors going through a dangerous boom. sometimes