It also means that banks with the same ratios of capital to risk-weighted assets actually display different levels of resilience. Consequently, excessive risk weight variability makes banks’ capital ratios less comparable and less transparent reducing the market’s confidence in them. This is what happened during the crisis; investors lost confidence in regulatory measures of capital and started constructing their own. To accompany this speech, I include a paper co-written with Marc Hinterschweiger and Tobias Neumann that presents detailed analysis of the issue of risk sensitivity in capital regulation. 10  Here, I would like to highlight two things from this work. First, the evidence supports the hypothesis that more granular and risk-sensitive measures reduce incentives for banks to take on more risk (“risk shift”, in the jargon). In the paper, we compare mortgage lending of UK banks using internal ratings based (IRB) models to UK banks using less risk-sensitive standardised approaches after the implementation of Basel II in 2007. (Basel II was the reform that allowed banks to use their much more granular and risk-sensitive internal models to assess capital for mortgages and other credit 8  See https://www.bis.org/press/p171207.htm. See https://www.bis.org/publ/bcbs240.pdf and https://www.bis.org/publ/bcbs256.pdf. 10 Hinterschweiger, Neumann, and Saporta (2018), ‘Risk sensitivity and risk shifting in banking regulation’, Bank of England Financial Stability Paper No.44, https://www.bankofengland.co.uk/financial-stability-paper/2018/risk-sensitivity-and-risk-shifting-in-bankingregulation 9  4  All speeches are available online at www.bankofengland.co.uk/speeches  4  exposures.)

18 See the Communique of Finance Ministers and Central Bank Governors, on which the Bank sits, March 2018, https://g20.org/sites/default/files/media/communique_-_fmcbg_march_2018.pdf. 19 See page II of the executive summary of the Financial Stability Report November 2017, https://www.bankofengland.co.uk//media/boe/files/financial-stability-report/2017/november2017.pdf?la=en&hash=F6D65F714A7DC28394BC4FCC9909CCD39E28AD10. 7  All speeches are available online at www.bankofengland.co.uk/speeches  7  Other reforms that form part of Basel III, as well as other elements of the post-crisis regulatory framework, will be implemented as part of the forthcoming new Capital Requirement Directive and Regulation. These are likely to be implemented in around 2020-21. Table 1 sets out the pipeline of policies to be implemented. New risks  Turning now to the identification and handling of new risks. Regulators must avoid the temptation to keep on fighting the last war while failing to recognise other, new risks. The last war was mainly focussed on the inadequacy of bank’s capital and liquidity, the inadequacy of frameworks to tackle too big to fail, and the lack of individual accountability. And these issues are and will continue to be important in any future prudential regulatory regime. But the world has also changed since. As my colleague, Lyndon Nelson, has recently set out, technology is transforming the payments and banking industry and, together with opportunities, it brings with it new risks. 20  And his answer to fighting this new war  was that PRA-regulated firms need to be on a WAR footing; that is, they should be able to withstand, absorb, and recover from operational shocks.