on market liquidity. the official sector takes such concerns seriously and is already looking closely at them. we should not however set the objective of ensuring a return to pre - crisis liquidity conditions. liquidity premia were likely too low with liquidity risk very probably under - priced before the crisis. prior to the crisis, market - makers were permitted to fund their inventory with dangerously high levels of leverage, funded at very short - maturities. though lax standards allowed dealers to carry high levels of inventory and to easily accommodate shifts in the demand for market making, dealers were vulnerable to falls in asset prices and tightening in bis central bankers ’ speeches wholesale markets conditions. when faced with severe stress, they were forced to withdraw from market making altogether. with regulation tighter, it may be harder for dealers to absorb inventory when end investors wish to offload assets ; market liquidity may start to fall away at an earlier point. market participants will need to recognise this change in market structure and adjust their balance sheets accordingly. but the catastrophic risk, of dealers withdrawing from market making altogether because balance sheets have become dangerously overstretched, should be much reduced. managing the impact of failure with a zero - failure regime neither feasible nor desirable, reform is also underway to reduce the impact of failure as well as its probability. and specifically to allow even the largest banking groups to fail and be resolved in a safe way without recourse to taxpayer funds. the key is to be able to recapitalise a failed group safely, quickly and credibly by bailing in the group ’ s uninsured, unsecured creditors, such as debt - holders. to be clear, the aim is not to resurrect every failed business, though that may be the outcome in some cases. the aim is to enable the critical parts of the group – the parts vital to the real economy and the parts that financial stability depends upon – to keep operating so the group can be safely resolved over time. the ultimate solution could involve a mixture of sales, administrations and run - off. the bail - in provides the time and the loss absorbing capacity to allow that to happen. the required legal framework is well progressed. in both the uk and us, it will in future be possible to bail - in debt holders. an eu framework has been agreed with the banking recovery and resolution directive, which will come into effect in january next year. this not only provides the powers for bail in. it actually mandates that 8 %

to be weighed against the ( as yet uncertain ) costs of the subsequent crisis. secondly, and more significantly, it is not clear that this policy would have tackled effectively the major problem of banks ’ misjudgement of risks and expansion of financial sector balance sheets. at the margin, it might have led to a little more caution among financial institutions, but unless policymakers had been prepared to shock the economy into a period of slow growth it seems unlikely that the financial crisis would have been wholly averted. however, modestly higher bank rate might have had the merit of discouraging households and firms from increasing their own debt levels, and therefore left the economy somewhat more resilient in the face of the crisis. thirdly, action only in the uk might have had limited effect on what has proved to be an internationally widespread crisis whose roots lie to a significant extent in the excess of savings in asian countries and consequent excess of capital inflows into the us and europe. the conventional answer to the question about the pre - crisis period therefore has become that policymakers did not have the right tools available. in the uk there was no provision for macroprudential instruments to be used to deal directly with the problems building up within financial institutions, and to a lesser extent in the indebtedness of households and firms. a more targeted approach to these issues seems highly preferable to using the blunt instrument of bank rate. but despite these cautions, it is possible that it would have been preferable to have taken a more long - term view of the risks to inflation from economic instability. certainly i seriously underestimated the scale of the downside risks from a potential financial crisis, and that implied overrating the ability of monetary policy to offset this shock. i will return later to the question of how a more long - term perspective might sometimes alter the desirable approach to policy. before that, i want to discuss some issues around the mpc ’ s inflation projections and how we assess uncertainty. the balance of demand and supply the mpc ’ s projections for inflation, absent external shocks, are determined to a significant extent by our judgements about inflation expectations and about the likely developments in the pressure of demand on supply ( this phrase is a better description than the more usual “ output gap ” – however i will now use the latter as a convenient shorthand ). during my stint large ( 2005 ). gieve ( 2009 ). on the mpc, the way in which