There is also a question of whether removing risk-based standards is necessary or desirable. Placing leverage and risk-based standards on a more equal footing might give us the best of both worlds, with them acting jointly as regulatory bookends. Whatever the merits of particular proposals, it is entirely right that the official sector should continuously assess whether the financial system has adequate capital insurance to deal with too-big-to-fail problems. The emerging consensus, within academia, officialdom and among market participants, is that it has not. Despite enormous progress in developing policy proposals, too big to fail is an itch that remains unscratched. Were this debate to conclude that greater capital insurance was necessary, this would pose challenges to the world’s largest banks – but also opportunities. A more prudent capital rule could, over time, give regulators greater assurance. Too-big-to-fail could, over time, be removed from our lexicon. Over-complex regulation could, over time, be streamlined from our legislatures. Supervisors and compliance officers could, over time, be reemployed as brain surgeons. And banks, over time, could be left to run themselves, albeit within pre-defined constraints. This is a deal a foresighted CEO, or indeed official, might wish to strike. Conclusion Over the course of the past 20 years, banking regulation has edged in a self-regulatory direction for understandable, but self-defeating, reasons. The regulatory regime has tilted from constrained discretion to unconstrained indiscretion. It will be a long journey home, but that journey has started.

3  0% 5 - completely trustworthy  (a) Based on survey responses of over 130 investors carried out in H1 2012, of perceptions over the previous year. BIS central bankers’ speeches  0 Up  Not changed  Down  Source: Barclays Capital. (a) Based on survey responses of over 130 investors carried out in H1 2012, of perceptions over the previous year. 13  References Admati, A and Hellwig, M (2013), The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, Princeton University Press, Princeton, USA. Aikman, D, Deb, P, Farag, F, Madouros, V, Neumann, T, Saporta, V and Wagman, K (Forthcoming), ‘Has the Quest for Risk Sensitive Capital Requirements Achieved its Aims?’. Babel, B, Gius, D, Gräwert, A, Lüders, E, Natale, A, Nilsson, B, Schneider, S (2012), ‘Capital Management: Banking’s New Imperative’, McKinsey Working Papers on Risk, No 38. Basel Committee on Banking Supervision (2013), ‘Regulatory Consistency Assessment Programme: Analysis of Risk-Weighted Assets for Market Risk’, available on: http://www.bis.org/publ/bcbs240.pdf. Berger, A and Bouwman, C (2013) ‘How does capital affect bank performance during financial crises?’, Journal of Financial Economics. Blum, J (2008), ‘Why Basel II may need a leverage ratio restriction’, Journal of Banking and Finance, 2008, Vol 32, Issue 8, pp 1699–1707. Blundell-Wignall, A and Atkinson, P (2011), ‘Global SIFIs, Derivatives and Financial Stability’, OECD Journal: Financial Market Trends, Vol. 2011, Issue 1. Blundell-Wignall, A and Roulet, C (2013), ‘Business models of banks, leverage and the distance-to-default’, OECD Journal: Financial Market Trends, Vol. 2012, Issue 2.