big or too important to fail is bad for competition in the industries that we regulate. an industry where exit is too difficult is one where entry is likewise inhibited. this is what we see in the banking industry. embedding resolution into the public policy objectives of financial regulation matters for two reasons relevant to competition : first, because, to repeat, exit enables entry ; and, second, because if, as we will, we require new entrants to satisfy us on their resolvability in order to be authorised, we will lower the barriers and costs of opening for business. put simply, if we don ’ t know how to deal with a failed firm, we will inevitably set a higher barrier to entry. we have already started to put this new approach into operation. resolution of failed firms consistent with the public policy objectives is one key plank of the new approach to financial regulation. another key plank concerns the macro prudential approach to regulation. the legislation has formally established the financial policy committee ( fpc ) charged with the primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the uk financial system. the fpc also has a secondary objective, to support the economic policy of the government, including its objectives for growth and employment. the root of the introduction of macro - prudential regulation sounds quite obvious, which is to take into account the impact of financial regulation on the functioning of the real economy. obvious you might say – yes, but it wasn ’ t done in the past. macro - prudential regulation is focused on protecting the financial system as a whole. it is quite simply about ensuring that financial regulation is conducted with an eye on the state of the economy. in a very big picture sense, there is nothing new about this activity. the problems of the last five years have emphasised the close links between the health and behaviour of banks and the condition of the economy. this is a lesson of history, and one that should not have been forgotten. but, forgotten it was. a clear objective of macro - prudential policy is to act in a countercyclical fashion – to restrain booms by acting to tighten regulation, and to seek to dampen the impact of busts. unfortunately, the record of the past shows that the behaviour of regulators has not been consistent with these objectives. the crisis illustrates the dangers of not applying restraint in what appeared to be good times

s momentum. the downside risks, if they materialize, could weigh on economic activity. basic principles of risk management in a low neutral rate environment with compressed conventional policy space would argue for softening the expected path of policy when risks shift to the downside. 3 our review with recent indicators suggesting the expansion is continuing at a solid pace and unemployment at a 50 - year low, inflation has not yet moved to our goal on a sustained basis. in many ways, that can be viewed as an opportunity, with the sustained expansion providing critical job opportunities to a broader set of applicants. in parallel, it is also vital that a central bank meets its inflation target on a sustained basis, which will provide more capacity to buffer the economy if it encounters headwinds. 1 / 4 bis central bankers'speeches we are undertaking our review to ensure we are well positioned to meet our goals for many years to come, especially in light of the way the economy is changing, which i have been referring to as the “ new normal. " 4 there are a few key features of that new normal. first, interest rates have stayed very low in recent years in the united states and in many other advanced economies, and it seems likely that equilibrium interest rates will remain low in the future. low interest rates present a challenge for traditional monetary policy in recessions. in the past, the federal reserve has typically cut interest rates 4 to 5 percentage points in order to support household spending and business investment. however, when equilibrium interest rates are low, we have less room to cut interest rates and less room to buffer the economy using our conventional tool. another big change in the economy is that inflation does not move as much with economic activity and employment as it has in the past, which is what economists mean when they say the phillips curve is very flat. a flat phillips curve has important advantages : the labor market can strengthen a lot and pull many workers who may have been sidelined back into productive employment without an acceleration in inflation, unlike what we saw in the 1960s and 1970s. on the other hand, today ’ s low sensitivity of inflation to slack, along with the limited ability to cut interest rates in a recession, means it can be more difficult to achieve our 2 percent inflation objective on a sustainable basis. the limited ability to cut interest rates could provide less ability to buffer the economy in a downturn, while the very flat phillips curve could make it harder to boost inflation during an expansion. and that could further compress