##udential regulation over the coming years. conclusion : the road ahead where does all this leave us? it ’ s clear that we macro - prudential policymakers need to look forwards as well as backwards as we do our risk assessment. and we must also ground our analysis in the impact of shocks to the financial system on businesses, households and so the economy, and not just their impact on financial players. the source of shocks and the mechanisms through which the financial system could amplify those shocks is wide – covering climate, covid, crypto, cyber, and conflict as well as the credit cycle and the core banking system. but our understanding of many of these is still developing, reflecting differences in the maturity across our framework. the consequence is that like any health check the list of what we need to review is long. and so the key is how we prioritise our work and what prescriptions we write on the back of it. that ’ s a daunting task. but helpfully while for some issues only the macro - prudential policymaker can do the job, for other issues just like a gp we can call on the help of specialists. i ’ m not proposing to write any prescriptions in this speech today. but the bank and fpc are working hard on their diagnoses and will aim to communicate further on issues that they wish to prioritise later this year, through the bank ’ s financial stability strategy and the fpc ’ s mediumterm priorities. and i hope that today has given you a flavour of the importance of building a macro - prudential framework that ’ s as fit for the risks and opportunities of the future as it is for those we have faced in the past. the views expressed here are not necessarily those of the financial policy committee. i am grateful to nicola anderson, kristina bluwstein, giovanni covi, tom daniels, emma moriarty, nicholas vause, danny walker and gabija zemaityte for their assistance in drafting these remarks. i would like to thank jon cunliffe, alina barnett, geoff coppins, lee foulger, grellan mcgrath, jon relleen and matt waldron for their helpful comments. 1 numbers based on the office of national statistics publication “ the 2008 recession 10 years on ”. the global financial crisis led to a loss of economic activity equivalent to around £20, 000 per person in the uk, based on the net present value

based standards with risk weights set by regulators for a small set of asset categories. chapter 2 begins with the introduction of the basel accord. this was a landmark agreement : the first - ever genuinely international banking accord, based around an 8 % bank capital ratio, with internationally - set risk - weights applied to a small set of banks ’ assets. the accord was explicitly designed to lean against an international “ race to the bottom ” in capital adequacy standards ( goodhart ( 2011 ) ). it also helped ensure a level international playing field. chapter 3 commences with the market risk amendment to basel i in 1996 and continues through to the basel ii agreement of 2004. these were a direct response to the perceived failings of basel i. in particular, the lack of granularity in risk weights under basel i was felt to have created arbitrage possibilities, with risk migrating to lower risk - weighted asset categories. permitting use of banks ’ own internal models to calculate risk weights provided such granularity. it also aligned regulatory capital with banks ’ own economic capital calculations, thereby prospectively reducing arbitrage incentives. by setting internal model - based capital bis central bankers ’ speeches charges below those from simple standardised approaches, basel li provided banks with strong incentives to upgrade their risk management technology. the move from regulator - set to model - set capital charges had two significant side - effects. first, it added materially to complexity. for a large, complex bank, the numbers of calculated risk weights rose from five to hundreds of thousands, perhaps millions. second, the use of models moved decision - making on risk weights from regulators to banks. once a model was admitted, the system was essentially self - regulatory. the final chapter, basel iii, commences in 2010. experience during the financial crisis demonstrated both that capital had been set too low and that it had been defined too broadly. basel iii raised the level, and narrowed the definition, of bank capital. in those respects, it was a very significant improvement over its predecessors. at the same time, the complexity and self - regulatory aspects of basel ii remained in basel iii. each of these historical chapters was a logical response to the perceived problems of the day. even with the benefit of hindsight, these steps seem like sensible ones. in particular, there appear to have been three key objectives behind the evolution of international bank regulation over the period. • first, to level the international playing field and prevent a race to the bottom in capital ad