sector has expanded significantly over the last few years – and international collaboration is key to enable those organisations that are further ahead to encourage others to make similar, or perhaps even bigger, strides. i ’ m delighted to have been recently appointed as chair of the sustainable insurance forum ( sif ). sif serves as the platform for insurance supervisors and regulators looking to address sustainability issues, enabling collaboration, sharing of knowledge and identification of best practices. coordination at the international level – through platforms like the sif and also the network for greening the financial system ( ngfs ) – enables the development of consistent standards that can be implemented globally. just as importantly, collective action also reduces the risk of individual states undercutting on standards to gain a competitive edge – international consensus as a means of addressing collective action problems. i ’ m very pleased that the abi has chosen to focus on climate risk as one of the themes of today ’ s event. furthermore, the abi ’ s recent joining of the un environment programme ’ s principles for sustainable insurance initiative – the largest collaborative initiative between the un and the insurance industry – is an important step. this commitment to coordinated action between industry, regulators and governments alike is essential given the global nature of climate change impacts. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice conclusion there is clearly plenty of work left to do – but there are also plenty of opportunities to take. the united kingdom has a relatively unique chance to establish a new position within the international insurance system, maintaining strong links with the eu but also looking further afield ; whilst also ensuring that our regime is tailored best to fit our domestic requirements. we now have the ability to set our own direction. i have aimed here to set out what direction that might be – an approach that enables healthy competition, and the benefits competition brings, without sacrificing our reputation for strong prudential standards. all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice

of the key judgements are, first, what prescribed stress scenarios are appropriate inputs ; and second, what thresholds for satisfying these stress - tests are set. both are fiendishly difficult. on the first, a stress scenario is just one point in a probability distribution. which point to choose – indeed, which distribution to choose – is a matter of judgement. consider the two distributions for uk gdp growth shown in chart 6, one taken from the ten years to 2007, the other across a longer 150 - year sample. 2 the standard deviations of these two distributions differ by a factor of 4. 5. for a financial firm that is 30 - times leveraged, that can easily be the see haldane ( 2009a ), “ why banks failed the stress test ”. see www. bankofengland. co. uk / publications / speeches / 2009 / speech374. pdf difference between landing in the red rather than the black. in that sense, stress tests are not something it is possible definitively to “ pass ” – though experience suggests they are somewhat easier to “ fail ”. on thresholds, determining the optimal level of capital for a bank is an area which has been chronically, and perhaps surprisingly, under - researched. policymakers have repeatedly ducked this question. aggregate amounts of capital in the financial system have been fixed at the same levels which prevailed at the time of the first basel accord. and academics have, to my knowledge, no definitive quantitative answer to the optimal capital question. longer runs of data, while interesting, are far from definitive. over the past 150 years, capital ratios among us commercial banks have fallen roughly by a factor of ten ( chart 7 ). is the optimal capital ratio to be found from experience in the 1990s – roughly, 5 %? or from the interwar years – roughly 10 %? or from the latter half of the 19th century – between 20 % and 40 %? answering those questions will mean reassessing the validity of the modigliani / miller ( mm ) theorem in today ’ s capital markets. 3 mm states that firms ’ debt / equity ratios are essentially irrelevant to their total cost of capital. why? because a rise in leverage generates offsetting movements in the cost and risk of banks ’ capital, in a frictionless world leaving the riskadjusted cost of capital unchanged. by revealed preference, owners and managers of banks have rejected the mm hypothesis. they seem to perceive that raising equity is,