banks have taken advantage of those conditions. the targets that were set as a consequence of the fpc and pra exercise of nearly two years ago have been met ahead of schedule. the banking system is now more able to support lending and the growth of the economy. i will repeat something that i have said often before, namely that a well - capitalised banking system is essential to support the economy. no good comes from having a fragile system. the evidence from the bank of england ’ s regional agents through their contacts with borrowers among companies is that there is more lending on offer but companies are reluctant and wary about banks, and this picture is consistent with the economy wide figures. given the evidence of revealed misconduct, we should sadly not be surprised at this wariness, but neither can we be relaxed about it. my second important development comes in the field of life insurance. insurance as a whole is a vital industry to all of us, performing the essential function of enabling us to manage our risks. within the insurance industry, life firms provide access to retirement income and longterm savings as well as financial protection against mortality. earlier this year the government made a major announcement on annuities, which are an important part of retirement provisions. like many people, this struck me as a sensible announcement, pointing to a clear need for change. the big question of course, is what next – or if not that, bis central bankers ’ speeches what else? we heard something on that earlier this week. i am not going to reflect on that tonight, but while the original announcement came as a shock to some business models, the pra ’ s assessment was that it did not appear to compromise the safety and soundness of firms in way that threatens our objective, and nor did it threaten our insurance objective of policyholder protection. no firm has failed, but bear in mind that orderly failure is very much consistent with our objectives being met. that is what should happen in my view, namely the prudential position should be sufficiently safe and sound to accommodate changes in other areas of public policy. it is not easy in our world to point to indications of when our objectives are met, a point made to us quite rightly by the national audit office. i would offer this as one such indicator. i will spend the rest of my time commenting on a four areas where we are either taking action or watching very carefully to determine whether action may be required. the first is the capital framework for banks – which

is distinct from, but related to, the capital position of banks that i mentioned at the start. there are now three planks to the capital framework : a risk - based assessment which may be based either around firms ’ internal models or a standardised approach ; a measurement of leverage ; and stress tests. together these approaches provide firms and us with the tools to do two things : to add up overall capital requirements ; and as diagnostic tools to allow the probing and analysis of strengths and weaknesses of firms ’ positions. i cannot emphasise enough that good judgemental supervision which is forward - looking employs diagnostic tools. none of these tools will provide the “ right ” answer, they are not tablets of stone. they enable assessment and challenge, by managements, boards and supervisors. the idea that we could rely on one of these tools alone, which you can read in some books, is, let me be blunt, naive. good supervision looks at things from different angles in order to build up pictures. in the same vein, i do not agree with those who say that we should disallow firms ’ internal models. that amounts to saying we are not interested in how firms ’ manage their own risks and that somehow we have better models to use. but, we don ’ t rely exclusively on firms ’ models, and we challenge them hard ; and we throw them out when we don ’ t like them, and we have done that. good prudential supervisors are bold enough to do that. the lesson is look at models, but do it properly, and to do that is not a simple job. toward the end of the year, we will publish the results of our first round of simultaneous across major uk banks stress tests, which will follow the publication by the european banking authority of its stress tests in just over a week from now. our stress tests are a real step in the direction towards the full use of such tests as one of the three pillars of the capital framework. this is a major development compared to the cumbersome and slow process of stress testing one bank after another that we developed during and after the height of the crisis. we will be using these tests to assess whether firms have capital positions and capital plans looking forwards which will provide re - assurance that they will be safe and sound under stressed conditions, as the name suggests. if they don ’ t – and you should take no inference on the results from what i say here – we will ask them to look again at their plans