However, recent empirical estimates for the UK suggest the effect is qualitatively present with the increase in banks’ overall funding costs due to higher capital requirements lower than in the absence of the theorem by 45% (Miles et al 2013) and 53% (Brooke et al 2015). 11 For example, the now defunct authority regulating the US Government-sponsored mortgage agencies stress tested them to only an 11% fall in house prices – a more severe shock than any nationwide house price decline to be found from 1945 onward. The peak-totrough fall of 11% was calibrated based on house price data for the West South Central Census Region between 1984 and 1993. Frame et al (2015) show that an alternative scenario based on realised post-2006 data would have revealed that Fannie and Freddie’s capitalisation was much weaker than what the original stress tests suggested. It wasn’t only regulators who made the mistake of relying on the recent past only. During a week when Goldman Sach’s Global Equity Opportunities fund lost 30%, Goldman’s chief financial officer famously stated: “We were seeing things that were 25-standard deviation moves, several days in a row.” His focus was too narrow. While the moves in 2007 were substantial, they were not unprecedented. Even within the last thirty years, equity prices had experienced larger single day falls than they did during 2007. 12 Danielsson et al (2016) show that systemic risk indicators constructed with market data were low and falling before the stress events in 1997 and 2008, and shot up during the events.

18 Forbes and Warnock (2012) present evidence that high capital inflows can end suddenly, with global factors typically more important than the domestic macroeconomy. 19 Cesa-Bianchi et al (2017) find that foreign credit growth is a strong predictor of financial crises, over and above domestic credit growth. The result is driven by a combination of contagion from foreign crises, capital inflows and (global) market sentiment. 20 The first number is the April 2008 Global Financial Stability Report’s estimated subprime-related global bank losses as of March 2008 (IMF (2008), Table 1.6). The second number is the April 2009 Global Financial Stability Report estimated potential total mature economies banking sector write-down for the 2007-2010 period (IMF (2009), Table 1.3). The corresponding April 2010 Global Financial Stability Report estimate revises this number down to 2.3 trillion (IMF (2010), Table 1.2). 21 Bardoscia et al (forthcoming). 22 Cont and Schaanning (2014). 23 This was revealed during the crisis where some investors – typically ‘shadow banks’, which took bank-like risks but without being subject to commensurate regulatory standards – funded their investment in long-term securitised assets with short-term asset-backed commercial paper. When this funding was withdrawn during the crisis, it resulted in a sell-off of these long-term assets, depressing their price (Brunnermeier, 2009). 24 Regulated open-ended funds include mutual funds, exchange-traded funds, and institutional funds. Based on BlackRock, The Investment Company Institute and Bank calculations. 25 In 2015, Bank and FCA staff conducted a joint information-gathering exercise on investment funds with large holdings of corporate bonds.