that can arise in implementation even when there is international agreement on standards – a theme to which i will return. on shadow banking, the fsb has identified activities outside the banking sector that can give rise to some of the same risks as banking. and this is beginning to generate proposals for regulatory reform. the us and eu have, for example, developed proposals on regulation of money market funds. and there should be an important first agreement this year on how to manage systemic risks that can arise from securities financing transactions such as in the huge global repo market. finally, ending “ too big to fail ”. this may well be the litmus by which the public judges the success of the entire reform programme. nothing has so incensed public opinion and damaged societal support for the financial sector than the apparent “ heads i win, tails you lose ” experience of private profits and pay when things went well and public losses when they did not. we will not fully restore public confidence until we can show that we can resolve failing banks – no matter how large – without public support. have we made major progress towards that? yes. first, the uk, the eu, the us and many other jurisdictions now have or will soon have the legal powers to break up and wind up failing banks with far less threat to the economy as a whole. these powers include the ability to “ bail in ” a bank ’ s creditors, making them not the taxpayer responsible for a failed bank ’ s losses once a bank ’ s equity has been exhausted. i should say here that it is crucial that the european parliament now gives its final approval to the proposed resolution directive. and that the directive and the new “ bail in ” rules form the bedrock of the new single resolution mechanism for the banking union in the euro area. second, in the uk and us legislation – vickers and dodd frank has been passed, structurally separating the activities that systemic banks are allowed to carry out. the aim is to ensure that riskier activities are not cross subsidised by, and do not jeopardise, the essential activities these banks carry out in the domestic economy. the eu is also considering how to address this issue following the liikanen report. third, and for the major international banks, with operations in many countries, we are moving towards international agreement on how these giants can be safely resolved. this means standards to ensure banks fund themselves with debt that is in a form that can be safely bailed - in should the bank fail.

has also brought a slowdown in growth in the far east and other emerging economies which is likely to test political as well as economic regimes. the challenge for policy it was clear last autumn that the financial crisis was leading to a squeeze on credit and lowering the prospects for growth and inflation in the uk. that was why the mpc, which had been raising rates as late as july, cut bank rate in december last year and followed with two more reductions in february and april. while the euro area started with lower rates and initially seemed less affected than the uk by a credit crunch, expected increases in rates were delayed. however, these downside pressures were not the only challenge to policy. oil prices which had been pushed up by the rapid growth in emerging markets took another dramatic jump and food prices began rising more quickly too. between 2007 and mid - 2008 oil more than doubled in price, while food prices rose by around 80 %. at the same time sterling which had climbed to $ 2. 10 in november 2007, fell back. the result was that consumer price inflation in the uk rose well above target to 3 % in april and over 5 % in september, its highest rate since 1992 ( while rpi inflation has been over 4 % for all but 4 months out of the past two years ). not surprisingly expectations of inflation also rose sharply ( chart 4 ), raising the risk that higher inflation would become embedded in decisions on the prices for other goods and services and on pay. of course commodity prices and inflation more generally have now begun to come down but i believe the risk of dislodging expectations was a real one, not a mirage. certainly i felt that to reduce rates during months when inflation was not only rising rapidly, but was rising faster than we had forecast, would be confusing and might weaken confidence in our resolution and the credibility of the inflation target. on similar grounds, despite the appreciation of the euro, the ecb raised rates in july this year. in the spring and early summer, the financial crisis also was showing some signs of stabilising in the us and in europe, particularly after the takeover of bear stearns in march signalled that the “ state safety net ” in the us had been extended to cover investment as well as commercial banks. the introduction of the special liquidity scheme in april here and extensive liquidity measures in the us led to a period in which funding pressures eased and libor spreads and cds premia softened. our august forecast was for a pronounced