crucial importance of our capital markets. first, in a world of less leveraged banks, a business model of originate and warehouse – because that is what it became by the middle of the past decade – is unlikely to be viable. maybe a genuine model of originate and distribute will emerge, with something like agencytype market making and trading. second, holders of bank paper – especially bonds – will be living in a different world. they will have a big incentive to monitor the riskiness of banks. this is prospectively very positive. a couple of years ago i asked around london who were the best analysts of banks. pretty well all those named were current or past equity analysts. a measure of success of our reforms will be that some leading analysts will concentrate on debt rather than equity, on the downside risks : credit analysts. they will be needed. maybe there are some already. the upshot is that withdrawing the safety net from banks will require the other parts of the financial system to be sound, because they will have to stand on their own feet. it is sometimes pointed out that the insurance industry – other than aig – did not benefit from state support. but, of course, insurance companies holding bank debt were the direct bis central bankers ’ speeches beneficiaries of state support for the banking system. regulators of insurers – including, in this country, prospectively the bank of england through the prudential regulation authority – will need to take the changed regime for banks into account. we no more want insurance to be part of a “ socialised ” financial sector than banking. finally on the “ whats ”, a world in which bank debt is perceived to carry risk is a world in which, as i have said before, it may be helpful for banks ’ management to be remunerated partly through subordinated debt rather than just equity. management would then have a clear personal incentive to focus on and contain tail risks. i understand that the eu code on remuneration would already be consistent with this. what i am describing is not a scary prospect. it should, in fact, be liberating to establish a financial system based more firmly on the principles of the market. but it is a prospective world in which our capital markets will be at least as important as they were over recent decades. that underlines the necessity of the work on, for example, standards for central counterparties, on shadow banking, and on transparent and resiliently liquid markets. this

. generalised inflationary pressures in the economy are also subdued. core inflation measures are running at 1. 3 %. that is a legacy of a long period following the crisis in which unemployment has been high and wage growth muted. 14 with additional falls in petrol prices in the pipeline, inflation is likely to fall further over the coming months and turn slightly negative for a period. it should pick up again in twelve months or so as the direct effects of a lower energy price drop out of the inflation rate. the bank has the means, will and responsibility to return inflation to the 2 % target within the next two years. that is consistent with the average horizon over which the mpc has sought to return inflation to target following overshoots in the past and with the nature of shocks the uk currently faces. the uk economy is expanding solidly. over half a million jobs have been created in the past year and there are signs that wage growth is picking up. interest rates can be expected to begin to return towards more normal levels over the next few years. relative to what we and the markets expected a year ago, that path of interest rate increases can be expected to be more gradual and more limited. 4. what is needed in the euro area? the challenges for monetary policy are much greater in the euro area than in the uk. since the crisis, euro area nominal gdp has increased by a mere 5 % in almost seven years. consumer price inflation is already below zero. core inflation has been running at or below 1 % for over a year. this is potentially dangerous. low nominal growth is intensifying the euro area ’ s debt burden ( chart 4 ). 15 the fear of stagnation is holding back spending and investment. the ecb ’ s actions last week were timely and welcome. they were also important not least because they removed any residual concerns about whether it has the will or means to meet its price stability mandate. by doing so, the ecb has reduced tail risks associated with the debt overhang to the extent monetary policy can or should. unit labour costs rose by 0. 5 % in the year to 2014q3, and unit wage costs rose by 0. 9 % over the same period, based on the mpc ’ s backcast for uk gdp. aggregate euro - area household debt was 61 % of gdp in 2007 and stood at 64 % in 2013. the corresponding figures for non - financial corporates were 94 % in 2007 and 100 % in 2013 and