secular fall in liquidity ratios ( chart 3 ). in the language of insurance, the excess on the central bank policy needs to be raised materially. the fsa ’ s proposed new liquidity regulation provides a good starting point. 21 second, central bank liquidity insurance frameworks need explicitly to recognise the possibility of drastic times requiring drastic measures. the key is to prevent such drastic action becoming disorderly on the one hand, and permanent on the other. the first can be achieved by having a pre - defined framework which recognises the need for abnormal liquidity provision, whether in size, collateral quality or term. the second can be achieved by setting prices ( fees and collateral haircuts ) for liquidity provision which discourage abnormalities from becoming regularities. the bank of england ’ s new sterling monetary framework, announced last october, seeks to apply those principles in practice. 22 • time - consistent deposit insurance : deposit insurance schemes have been stretched in many countries, to the point of offering blanket coverage of retail deposits. those actions are already damping the risk senses of depositors, who have rationally reacted by seeking out the highest - yielding accounts. this has contributed to a competitive frenzy in the retail deposit market. in the uk, retail deposit rates have risen over the past year from 100 basis points below base rate to 100 basis points above. in general insurance markets, distorted risk choices are guarded against by sharing the risk between insurer and insuree, ex - ante ( through risk - based premia ) or ex - post ( through co - insurance devices ). deposit insurance regimes in some, but not all, fsa ( 2009 ). bank of england ( 2008 ). countries have such features. in the uk, deposit insurance premia are not riskbased. private risk incentives would be better aligned with the public good if the uk ’ s deposit insurance regime had such a feature. • time - consistent capital insurance : in historical terms, capital insurance to the banking system is the newest of the state support mechanisms for banks. partly for that reason, its framework is least well advanced. indeed, give or take, there is no framework at present. whether one is needed will depend importantly on the levels of private capital held in future by the banking system – the degree of self - insurance. that debate has some distance still to travel. but there are complementary measures which could serve a similar purpose. for example, some academics have proposed private sector capital insurance schemes, funded ex

, provided effective resistance to inordinate developments. importantly, signalling vigilance proved instrumental in reaching a common understanding with the markets : the ecb, though observationally inactive, was at any time ready to start action. our policy course was rightly seen as always contingent on the arrival of new information. given the information available each time the governing council meets, the standing assumption in the markets should always be that the policy decision is aimed at positioning the stance of policy appropriately. no history of past monetary policy decisions could ever be taken as an indication of a commitment, on our side, to enact a sequence of interest rate moves in the future. unconditional – or “ quasi - unconditional ” – talk about future policy would have impaired the difficult balance that we maintained between supportive credit conditions and persistently anchored inflation expectations. active emphasis in communication upon “ alertness ” required keeping all options open to a – possibly quick – change in policy. pre - commitment to a policy path would certainly have made that reversal of policy difficult to execute and / or to justify, and therefore non - credible. the markets seem to have internalised these strategic principles with an increasing degree of precision. incoming data which, since the autumn of 2005, have indicated more persuasive signs of a recovery in an environment of abundant liquidity and elevated commodity prices were correctly mapped into expectations that the stance then prevailing would not be consistent with controlling inflation over the medium term. markets anticipated in good time that the ecb would soon begin reversing the extra easing that had been put in place. in retrospect, market expectations have aligned well with our intentions. since december, consistent with our remit to be alert and pre - emptive, the monetary policy of the ecb has been perceived to be in a mode of progressive withdrawal of monetary accommodation. indeed, this withdrawal has been and remains conditional on the evolution of our analysis with respect to our objective of price stability, but it has not been predicated on any single short - term indicator of the macroeconomic state. in the last few months, the ecb has not measured the state of the economy by the strength or weakness of any particular piece of incoming news. it has continued to extract the macroeconomic trend from the another way to state this notion is that in an economy such as the euro area, where prices and wages are as rigid as they prove to be, the “ sacrifice ratio ” is probably large. this means that the action