range of collateral, on terms designed to avoid encouraging imprudent liquidity management. and this year we have effectively been acting as a market maker of last resort in certain corporate - credit markets. given the significance of capital markets in today ’ s financial system, central banks need to think about whether or not such operations should be a permanent part of their armoury. today, i want to outline our thinking on the third element of the social contract. taking it to be about only deposit insurance turns out to be too narrow. it is really about what society should demand of banks to make their failures marginally more tolerable. it is not often a central banker can speak openly about bank failures. indeed, most of the time, central bankers avoid public remarks on issues like too big to fail ; emergency liquidity assistance ; flaws in insolvency regimes ; burden sharing between national authorities, and so on. but surrounded as we are by failed banks, it is not only possible to talk about bank failures without scaring the horses ; it would be irresponsible not to do so. and as central bankers and regulators free themselves from that mental strait - jacket, new and perhaps far reaching ideas are emerging. they amount to redrawing the third element of the social contract between the authorities and the banks. to recap, the third element has been that the banking system should bear the cost of insuring retail depositors with banks against loss. the lessons go, narrowly, to the construction of such insurance ; but also to a broader reformulation in which deposit insurance is just one component of the overall package. deposit insurance : risk - based premia and pre - funding for most of the past thirty years, deposit insurance in the uk applied to modest amounts, and provided less than 100 % cover of the insured amount. the element of “ co - insurance ” was intended to leave retail depositors with an incentive to take care where they deposited blunden g, “ supervision and central banking ”, bank of england quarterly bulletin, august 1987. since the turner report was published, adair turner has himself added this point to the fsa ’ s list of conclusions. “ the repertoire of official sector inventions in the financial system : last resort lending, market - making, and capital ”, speech by paul tucker given at the bank of japan ’ s 2009 international conference in tokyo on 28 may 2009. also see, “ the development of the bank of england ’ s market operations ”,

system and the institutional architecture have been fundamentally reformed. the capital requirements of large global banks are ten times higher than the pre - crisis standard. liquid assets – see blanchard, o., and j. gali ( 2007 ). " real wage rigidities and the new keynesian model ". journal of money, credit, and banking, 39 ( 1 ), pp. 35 - 65. all speeches are available online at www. bankofengland. co. uk / publications / pages / speeches / default. aspx relative to liabilities that can readily run – are also tenfold higher now than before crisis. we are ending too big to fail and transforming the resilience of financial market infrastructure. macroprudential is no longer the policy that dares not speak its name. to safeguard these hard - won reforms, europe now has a single supervisory mechanism and european systemic risk board. the bank of england now houses the prudential regulation committee and the financial policy committee. the independence of these committees and their accountability to the people they serve through their respective parliaments are essential bulwarks against the inevitable recidivism that follows a financial crisis. the longer we go without disruption the more important it is to remember, remember that when it comes to financial stability, success is an orphan. since the crisis, macroeconomic outcomes have been much less benign. growth in both the euro area and the uk has been, on average, a percentage point lower ; and inflation has been twice as volatile. there has been a persistent margin of spare capacity, with unemployment, on average, 1 - 1½ percentage points higher. but there have also been important differences. while the euro area has continued to experience ‘ divine coincidence ’ the uk has not ( chart 1 ). in the euro area, inflation has averaged half a point below target, reflecting in part the drag from persistent slack in the labour market. in contrast, uk inflation has been above target, averaging 2. 3 %, during a period where the economy was operating well below potential. that reflects the inflationary impacts of two large exchange rate depreciations and weak productivity that have offset a major positive shock to labour supply. this has created tensions between short - term output and inflation stabilisation in the uk that have not been evident in other major economic regions. chart 1 : divine coincidence has continued in the euro area great moderation inflation ( % ) financial crisis and after - 4 - 3 - 2 -