exchange rate ”, speech at thompson reuters, london. bis central bankers ’ speeches system is robust to shocks and that financial institutions can be resolved in an orderly manner. after all, financial stability is a national responsibility, with the uk taxpayer serving as the ultimate backstop of the uk financial system. the comprehensive reform of the uk ’ s institutional framework for financial stability since the crisis creates a coherent architecture of national macroprudential and microprudential regulators and supervisors. this is now commensurate with the scale and nature of the risks that the uk ’ s high degree of financial openness can pose. and it provides the foundations for the uk to remain the world ’ s leading international financial centre, one which can safely be home to the largest global, systemically important banks and insurers. the effectiveness of our reformed domestic framework for financial stability depends in part on the quality of financial regulation set at the eu level as well as the flexibility we have to apply that regulation to meet the uk ’ s specific financial stability challenges. in the main this combination has been achieved thus far. however, there have been some limits on flexibility in certain areas, including : a bonus cap restricting the proportion of pay that can be clawed back in the event of excessive risk taking or poor conduct, thereby weakening discipline from remuneration ; trigger thresholds for contingent convertible capital instruments that some may judge too low ; and a reduced role for national discretion in insurance supervision. while common international standards and effective eu rules should continue to support the operation of the single market, it is imperative that uk authorities, including the bank of england, continue to retain the flexibility to impose the high standards necessary to manage the world ’ s leading global financial centre. this flexibility may be challenged by how eu financial regulation evolves. ensuring the bank of england has the instruments necessary to achieve its financial stability objective will depend on the eu continuing to have regulations of the highest standards, which strike the appropriate balance between harmonisation and flexibility, and which accommodate necessary national responsibilities, including for supervision. 5. principles of a new settlement for financial stability a successful and sustainable economic and monetary union is important for the dynamism and stability of both the euro area and the uk. since the crisis, many euro - area economies have undergone difficult reforms to improve competitiveness. adjustment mechanisms to address the underlying problems of the euro area have been built, including measures to create a banking union and the development of the european stability mechanism, a permanent crisis resolution facility

the bust that follows boom. most obviously, openness ties the fates of trading nations together. that can mean a “ second engine ” for growth from abroad. but it can also mean a dragging anchor when things go awry across borders. see for example grossman, g and helpman, e ( 1991 ), innovation and growth in the global economy, mit press. bis central bankers ’ speeches 3. role of the eu in uk dynamism and stability how has the eu affected the uk ’ s dynamism and stability? let me begin with the first. 3. 1 role of eu in uk dynamism in some respects the uk is the leading beneficiary of the famous “ four freedoms ” first set out in the 1957 treaty of rome. 6 these are the free movement of goods and services, capital and labour, enhanced over time through a range of measures to reduce impediments across the eu. so although the uk ’ s dynamism is the product of many factors including deep human capital, well - developed physical infrastructure, a competitive fiscal regime and the rule of law ; the eu has arguably bolstered it by establishing the world ’ s largest single market with free movement of goods, services, capital and labour. the uk has further benefited from these dynamics by retaining relatively flexible labour and product markets. in product markets, home and foreign firms receive close to equal treatment ; the administrative burden on start - ups is second lowest in the g7 ; incumbent firms receive the lowest regulatory protection in the g7 ; and product market regulation is light ( charts 5 – 8 ). partly as a result, in 2012 the uk economy created firms at more than three times the rate of the us. 7 taken together, these measures promote competition and spur innovation which ultimately benefits us all. and the uk has managed to combine some of the most flexible labour markets in the g7 with some of the most cooperative labour relations ( charts 9 – 10 ). this relative labour market flexibility helps the economy to absorb shocks, illustrated by the experience of the great recession. uk unemployment rose by less than in the us, and has fallen faster than in the euro area. since the start of the global financial crisis, uk jobs have grown 3 percentage points more than the us. moreover, people ’ s attachment to the workplace has remained broadly intact. compare that with the case of some euro members, where youth unemployment in particular has been devastatingly high, and with the us, where