for financial than for non - financial companies. such high payouts are themselves something of a puzzle because, at least in theory, the payout ratio ought not to affect the value of a firm. 11 this may be a collective action problem, with firms fearful of sending an adverse market signal through lower payouts. third, for both financials and non - financial firms, the flow of dividend income is much less volatile than firms ’ stream of profits. in other words, there is evidence of firms systematically smoothing dividend payouts to shareholders. 12 this may also reflect a problem of collective action. fourth, the profits stream of the financial sector is significantly more volatile than for non - financial companies. that appears largely to be the result of large - scale, one - off losses by banks. this is as we would expect, given their greater leverage. fifth, as a result, the dividend payout ratio for banks is more volatile than for nonbanks. this behaviour is unlikely to support banking stability. it risks profits being distributed as dividends when they are most needed to augment capital ratios and boost confidence. in 1996, the chief executive of a famous company observed : “ we are an old - fashioned business, not a quoted plc, and we don ’ t pay dividends to shareholders ”. the chief executive? peter robinson. the company? liverpool fc. perhaps banks should have heeded the message. if they had, this crisis might have felt rather different. if uk banks had reduced dividend payouts ratios by a third between 2000 to 2007, £20 billion of extra capital would have been generated. 13 had payouts to staff been trimmed by 10 %, a further £50 billion in capital would have been saved. and if banks had been restricted from paying dividends in the event of an annual loss, £15 billion would have been added to the pot. in other words, three modest changes in payout behaviour would have generated more capital than was supplied by the uk government during the crisis. opportunistic behaviour is also needed to repair banks ’ liquidity positions. reversing the fall in the maturity of banks ’ balance sheets will require a front - loaded terming out of their debt liabilities. there is some evidence of banks doing so. but given the scale of the refinancing mountain, this will be an uphill struggle. there is also some evidence of companies tapping capital markets opportunistically to help repair their balance

how much we can trust these models now that the deviation of inflation from target is larger, owing to the magnitude of the energy price shock. as i have discussed on previous occasions, [ 20 ] one influence on this judgment is that state of the economy. the uk labour market is currently very tight by historical standards, with unemployment close to fifty - year lows. in parallel, the disruption to supply chains i have mentioned above has increased corporate pricing power. after all, for every producer that has difficulty sourcing its inputs, there is supplier one step earlier in the supply chain that faces strong demand and scope to raise prices. both a tight labour market and strong corporate pricing power are likely to increase the possibility that price and wage setting dynamics add to the intrinsic persistence in inflation. another influence on intrinsic inflation persistence is the magnitude of the shock itself. our standard models are linearised around the steady state defined by the inflation target. this approach is robust to small deviations from inflation target. but where deviations are substantial, non - linear effects may kick – and our standard models may underestimate inflation persistence. for example, now that inflation is substantially higher than target owing to the size of the energy price shock, firms may shift from a ‘ time - dependent approach ’ to pricing behaviour – say raising prices just once a year – to a ‘ state - dependent approach to pricing – say raising prices more frequently as energy costs pass different thresholds. such a change in behaviour will naturally change the dynamics of the inflation response, possibly creating additional intrinsic inflation persistence in ways that are not captured by our existing models. in principle, we can estimate new models incorporating such non - linearities. but, in practice – owing to the success of the inflation targeting regime in the past quarter of a century – we don ’ t have recent data from a period of high inflation. either we have to re - commission models from an earlier period ( when economic structures were very different on many dimensions ) or we have to rely partly on judgement as a complement to empirical analysis. in framing those judgements, we need to take a view what is driving intrinsic inflation persistence. in other words, we need to understand the structural economic behaviour underlying the propagation of the fundamental shock : we need a ‘ story ’ to explain what is driving economic outcomes, in particular price and wage behaviour. this brings me back to the energy price shock. the deterioration in the uk ’ s terms of trade owing to higher energy prices has adverse consequences for uk