companies, shareholder capital or equity is used to finance the acquisition of assets. the same is true for banks. equity finances the provision of loans to households and companies, and those loans are the banks ’ assets. in that sense, capital supports lending by banks and does not substitute for it. higher capital requirements ensure that enough of the finance raised by banks is in a form that can absorb losses without the banks failing. higher levels of capital enable banks to attract other non - capital funding, in turn making it easier for them to lend to households and businesses. at present it is the better capitalised banks that are expanding lending. how well are the banks doing in building resilience? there is good news here, as the banks have strengthened their capital positions since the darkest days of the crisis. but there is further to go. these capital positions are most often measured by the ratio of capital to riskweighted assets. risk is difficult to measure, but i think that we must continue to do this, albeit accepting the uncertainty in the process by using a healthy dose of scepticism, and aiming to keep the bis central bankers ’ speeches method of measurement as simple as we reasonably can. but it is helpful to back up the riskbased measure with a leverage ratio that simply measures capital as a proportion of assets. in the lead - up to the crisis, banks around the world chronically underestimated the risks to which they were exposed. the consequences were dramatic and highly damaging, and we are still living with them today. the crisis has been fundamentally a product of banks that grew rapidly and failed to back that growth with sufficient capital to bear the losses. the fpc has recommended that banks should ensure that they take the necessary steps to put our system in a place where it can support the economy without compromising its stability. the bank of england has taken steps to extend the funding for lending scheme, and within that has acted to provide a clear incentive to stimulate lending by banks to small firms. but banks that are short of capital cannot increase lending. that is why in march the fpc made a series of recommendations to ensure that uk banks are well capitalised, and that banks meet that requirement in a way that does not hinder lending to the economy. you may be assured that we are determined that the newly formed pra follows through on those recommendations. bis central bankers ’ speeches

##nometric analysis of official statistics. there are other and often crucially important pieces of information that come to us in more qualitative form. these include information from businesses about what they see happening in the economy. perhaps the most famous example of this in recent years is the productivity acceleration in the us in the mid - 1990s. the extensively revised official us data now show that productivity began accelerating in 1995. however, that was not visible until the vintages released in 1998. but as alan blinder and ricardo reiss have reminded us at this conference, chairman greenspan did not wait until 1998 to conclude that the underlying rate of productivity growth might be increasing. the key reason was that he talked with and listened to people who work in business. already in may 1996, when the fed ’ s model was forecasting increasing inflationary pressures going forward, alan said “ it is very difficult to take the existing structure of the nairus, capacity limits, and the usual potential analysis that we do and square it in any measurable way with what we sense from anecdotal reports ”. 1 in the uk, there does not seem to have been a productivity miracle. but we have had many examples of the importance of qualitative data in making judgements. for instance, there have been significant flows of migration that have expanded the potential labour force. by their nature, such flows are not accurately reflected in official data. but the bank of england ’ s business contacts were able to tell us that the ability to recruit new migrant workers was a growing and significant response to a tight labour market. the third lesson that alan has taught us is that it is the consistency over time of a policy framework that sustains a market economy, as the achievements of the united states over the last 200 years show very clearly. alan, of course, has stressed this in the context of price stability. but it applies transcript of fomc meeting 21 / 05 / 1996. equally well to the system of taxes, property rights and public goods provision on which prosperity in a market economy relies. alan famously defined price stability in the following terms : “ price stability is best thought of as an environment in which inflation is so low and stable over time that it does not materially enter into the decisions of households and firms. ” 2 i would suggest that implicit in this is a prescription that alan might write for all economic policies, not just monetary policy : namely, that economic policy stability is best thought of as an environment in