These 4  proposals are in line with the Bank’s leverage ratio policy statement published in 2015 and the statement of 5  policy on the systemic risk buffer framework from 2016. These proposals mark the end of the policy development cycle on this flagship reform since the crisis. Complementing these domestic structural reform measures, policymakers both here and internationally have put in place resolution regimes to end too-big-to-fail. Jon Cunliffe has recently discussed developments in this policy area. 6  A lot has been said about the progress made through these international and domestic reform agendas in 7  strengthening financial resilience , so I will not dwell more on this topic here. Suffice to say that UK banks’ ratios of high-quality capital to risk-weighted assets are on average over ten percentage points higher than 2  UK banks’ assets are close to 400% of UK GDP. See ‘UK leverage ratio: applying the framework to systemic ring-fenced bodies and reflecting the systemic risk buffer, Prudential Regulation Authority Consultation Paper 14/18, https://www.bankofengland.co.uk/prudential-regulation/publication/2018/uk-leverageratio-applying-the-framework-to-systemic-rfbs-and-reflecting-the-srb. 4 See ‘Implementing a UK leverage ratio framework’, Prudential Regulation Authority Policy Statement PS27/15, https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/policystatement/2015/ps2715.pdf?la=en&hash=5DBB377CD051FA67D16BCA1662DBE696682AF56B. 5 See ‘The PRA’s approach to the implementation of the systemic risk buffer’, https://www.bankofengland.co.uk//media/boe/files/prudential-regulation/statement-of-policy/2016/the-pras-approach-to-the-implementation-of-the-systemic-risk-buffersop.pdf?la=en&hash=6954AC9765597EB5598414171D90C25982A144CE. 6 ‘Central clearing and resolution – learning some of the lessons of Lehmans’, 5 June 2018, https://www.bankofengland.co.uk//media/boe/files/speech/2018/central-clearing-and-resolution-learning-some-of-the-lessons-of-lehmans-speech-by-joncunliffe.pdf?la=en&hash=954FF2E62AA3A5AB6ADCDEA88188FB6697F9B0CD. 7 E.g., see ‘What a difference a decade makes’, a speech by Mark Carney, https://www.bankofengland.co.uk//media/boe/files/speech/2017/what-a-difference-a-decademakes.pdf?la=en&hash=CA8F77C4F518DCFB8C697C03704773370C82326D, ‘Ten years on: lessons from Northern Rock, a speech by Jon Cunliffe, https://www.bankofengland.co.uk/-/media/boe/files/speech/2017/ten-years-on-lessons-from-northernrock.pdf?la=en&hash=9543F1499C211A505206615DA86C8C88D7988365, ‘The revolution is over.

We show that after the introduction of Basel II, UK banks that used internal models increased their lending to less risky mortgage borrowers and decreased their lending to risky borrowers, relative to banks on the less complex and less risk-sensitive “standardised” approach. Put differently, more granular risk-sensitive approaches appeared to have led to less risking up, exactly as the architects of Basel II intended. Second, we show that simpler measures of capital adequacy can do better than more risk-sensitive measures in discriminating between failing and surviving banks. Indeed, there is now a body of literature that suggests that the leverage ratio did better than the more risk-sensitive Basel I ratio in discriminating between weak and strong banks in the global financial crisis. The paper also offers explanations on why this may be the case. The first reason is statistical. More complex and risk-sensitive measures tend to be less “biased”, that is on average their predictions are closer to the real risk. But notice the emphasis on the words “on average”. Any model, including a zero bias model, can predict different results depending on the sample used. And the more complex the model, the more parameters involved and the greater the statistical variability in results or, “model variance”, other factors being equal. To reduce this model variance one needs large and high quality data sets. For low probability events, such as defaults on loans to highly-rated large corporations or to low-LTV mortgages, the data requirements become even larger.