mervyn king : monetary policy developments speech by mr mervyn king, governor of the bank of england, at the lord mayor ’ s banquet for bankers and merchants of the city of london, london, 21 june 2006. * * * my lord mayor, mr chancellor, my lords, aldermen, mr recorder, sheriffs, ladies and gentlemen : chancellor, i know how much store you put on education. so, in the modern spirit of audience participation, let ’ s see how our city audience matches up to the standards of the past. one hundred years ago, candidates for employment in the bank of england were required to take an examination. the arithmetic paper contained 16 questions to be completed in three hours. i ’ m going to give you just two questions and you will have either 15 minutes or the length of my speech, whichever is the shorter and i am in no doubt as to your preference on that, to find the answers. qu. 1 : simplify the expression ; ×4 1 − of 1 2÷ 3 1 5 5 7 + 1 − 3 6 8 12 qu. 2 : a person invested £2, 205 in a 3 % stock at 90. he afterwards sold out at 93 1 / 2, and invested the proceeds in a 4 1 / 2 percent stock at 98. what change was thereby made in his income? answers can be sent to the financial services authority. no compensation is available if you are incorrectly advised by your neighbour or any other person from the financial sector. twenty years ago, the city was anxiously awaiting its revolution - big bang. if ever there was an example of structural change in response to global competition, big bang was it. none of the leading broking and jobbing firms of the time now survives. yet the city, and the people who work here, are more successful today than at any time in its history. few in 1986 could have imagined how much the city would change and how far its domain would extend - from canary wharf to the west end, no longer a single square mile but a banker ’ s dozen. a key ingredient of the city ’ s success has been, as the lord mayor remarked, a stable set of rules within which to play up and play the game. simple, clear rules of the game are essential for a market economy to function. but excessive regulation makes life difficult for us all. in march of this year i received a letter from a certain government department which read as follows : “ dear mr. king ;

by mid - 2015, though, it stood at 15. 6 %, while the quality of own funds had improved perceptibly at the same time. the revamping of the basel framework is scheduled for completion before the end of this year. a further significant tightening of the capital adequacy requirements, in the sense of a " basel bis central bankers ’ speeches iv ", is not on the agenda, however. i think this is an important message, as the banking system should not be additionally burdened by unnecessary regulatory uncertainty. global systemically important banks ( g - sibs ), which are generally regarded as being " too big to fail ", will have to demonstrate their total loss - absorbing capacity ( tlac ) going forward. but the other eu banks, too, will be asked to hold capital instruments which, in a resolution event, can be converted into liable capital. bail - in will take precedence over bail - out in future. it needs to be possible to resolve distressed banks in an orderly fashion, with the taxpayer only footing the bill as a last resort. naturally, this implies higher risks to investors, who also witnessed this first - hand in the past few months. however, those now calling into question, yet again, the liability of owners and creditors should also step forward and say who should pay for the losses of a failed bank instead. this must not be the taxpayer, at any rate, for that would jeopardise the standing of our free market economic system in society at large. ladies and gentlemen the creation of the single supervisory mechanism ( ssm ) for banks in europe has been a significant step – the most important step, even, since monetary union was launched. the ssm has remedied an inherent flaw in economic and monetary union, consigning the occasionally rose - tinted glasses of national supervisors to the history books. much has been done, then, to make the banking system more robust. yet a banking system can only ever be truly stable if banks'reliance on the solvency of their national sovereigns is effectively reduced as well. too little has been done in this regard thus far. on the contrary : banks in some euro - area countries have invested heavily in their domestic government bonds in the past few years, making them even more reliant on the health and wellbeing of their governments'public finances. italian banks have pumped nearly all their capital into domestic government bonds, and the situation is similar in