is mixed. what is clear is that credit conditions are unambiguously tighter than two months ago, underlining that source of downside risk to the outlook for demand and inflation. in retail lending markets, banks have raised the interest rates charged ( relative to bank rate ) on new lending, but they have all been doing much the same and many borrowers seem to have been willing to pay the extra. in consequence, banks generally may not have achieved their desired conservation of balance sheet capacity, and we are now seeing the withdrawal of some lending products. and in wholesale markets, the spread between the price that the banks themselves pay for funds, roughly libor, and the expected central bank policy rate has, again, widened significantly over the past couple of months across the major international markets. many financial contracts are linked closely to three - month libor so, other things being equal, the increase in money market spreads has the effect of reducing the level of bank rate consistent with unchanged monetary conditions. at the committee ’ s march meeting, i judged that an immediate further cut, following february ’ s, might very easily have been misunderstood as a change of strategy away from the one focused on the medium - term outlook for inflation that i have spelled out this evening. my own vote at the april meeting will depend on all the data, some of it still to reach us, since then. financial system deleveraging : legacy portfolios whatever path monetary policy takes in the uk in the months ahead, it is clear that the process of deleveraging in the financial system is not complete. some asset prices embody a hefty discount for the current illiquidity in markets, which feeds into the accounting measure of financial firms ’ capitalisation, and so into perceptions of counterparty credit risk and money market conditions. in consequence, there remains a risk that credit creation – the lubricant that the financial system provides to the real economy – will be further impaired. several features of our financial system lie behind this, and i want to touch on just a few of them. financial markets have swung from a prolonged period of underpricing risk to now plausibly overpricing risk on at least some products. and yet, one might think perversely, we have also swung from an over abundant supply of credit to a much more restrictive supply of new credit. the global insurance industry provides an interesting contrast with banking in this respect. for sure, it too is capable of systematically mis

this tradeoff between risk sensitivity and competitive concerns, on the one hand, with the additional reporting burden on the other, so that we can develop a proposal for capital that is workable for the large number of banks that will continue to use basel i as amended. in addition to the basel i anpr, the u. s. banking agencies issued within the past two weeks a statement about the plans for basel ii implementation in the united states. the agencies had previously indicated a delay in the basel ii notice of proposed rulemaking based on the results from a recent quantitative impact study ( qis4 ), which showed a wider dispersion and larger overall drop in regulatory capital requirements for the qis4 population of banks than the agencies had expected. i am very pleased that the agencies, based on additional analysis of qis4 data over the summer, were able to come to an agreement on a way forward, described in the recent interagency statement. in our statement, we made every effort to provide as much information as possible to institutions interested in basel ii, and also, i hope, showed how seriously we are taking basel ii implementation and paying attention to its possible consequences. in particular, the agencies underscored the prudence we are using in moving to basel ii by revising the proposed implementation timeline and suggesting extra safeguards beyond the ones already in the basel ii framework. as we move forward, we continue to heed the findings from qis4, especially those relating to the overall level of regulatory capital. capital serves as an important backstop against risk - taking and we need to ensure that an adequate level of capital is produced by the basel ii framework. as i have said before, the federal reserve would not be comfortable qualifying any bank based on the results of qis4, if basel ii were to be applied today. the qis4 results demonstrated that bank data and risk - 3 / 5 management systems required by basel ii are not yet fully developed and implemented as expected by the framework. to be sure, by the time that basel ii " goes live, " bankers would have significantly more information regarding our expectations on model specifications and more robust default and loss - severity data. banks would also have to adhere to the qualification standards set by supervisors. the road to basel ii will take several more additional steps, but we believe they are well worth the effort. we will carefully review the comments to the anpr on basel i amendments, and then move to a notice of proposed