##rage. a well - known example of such behaviour is the use of securitisation and innovative forms of credit enhancement under the basel i risk weights ( see jackson, p ( 1999 ), ‘ capital requirements and bank behaviour : the impact of the basel accord ’, basel committee on banking supervision working paper no. 1, https : / / www. bis. org / publ / bcbs _ wp1. pdf ). such behaviour is, of course, not limited to the financial system, or in fact to humans : even dolphins have been observed ‘ gaming the rules ’ ( https : / / www. theguardian. com / science / 2003 / jul / 03 / research. science )! all speeches are available online at www. bankofengland. co. uk / speeches this is precisely what the final elements of the basel iii package seek to achieve. the package reaffirms the role of internal models as a primary means of guarding against risk shifting. it also firms up an international leverage ratio regime ( borrowing a number of elements from the uk regime ) while also, and more controversially, introducing an aggregate output floor calibrated at 72. 5 % of standardised risk weights to guard against excessive risk - weight variability. by introducing the output floor in addition to the leverage ratio, model variance will be constrained at a wider set of banks. the leverage ratio acts as a break to debt - funded asset growth focussed on low risk - weighted assets ( rwas ) ( chart 5 ). it binds for banks that specialise such assets, e. g. repo, clearing services, and low - ltv mortgages. on the other hand, the output floor affects banks for which the leverage ratio is not binding yet nonetheless might be exposed to model risk, for example banks that are active in a range of asset classes but their internal models tend to systematically produce results that are significantly lower than the rwas based on standardised approaches. the basel committee will continue to monitor closely the implementation of the basel iii standards, which will include the impact on risk - weight variability. what is next? the finalisation of basel iii signals that the wave of regulatory reform following the global financial crisis is now over. you should not expect a lot of further reform to bank regulation, particularly regulations regarding banks ’ capital and liquidity. the focus of regulators, both in the uk and internationally, is pivoting towards three things : completing the implementation of the post

unintended effects the reforms are having, as well as being alert to new risks that emerge. we will consider making adjustments to regulations in response to unintended consequences and new risks to ensure that the resilience we injected into the banking system post - crisis stands the test of time. or put in the words of the young tancredi in the novel the leopard by giuseppe di lampedusa, “ if we want things to stay as they are, things will have to change ”. thank you. https : / / en. wikipedia. org / wiki / the _ leopard. all speeches are available online at www. bankofengland. co. uk / speeches box 1 : the effect of the leverage ratio on over - the - counter derivatives as part of the evaluation of the effects of post - crisis reforms on incentives to centrally clear over - thecounter ( otc ) derivatives, bank staff have undertaken research on the impact of the leverage ratio on client cleared derivatives ( acosta - smith, ferrara, rodriguez - tous ( 2018 ) ). following the global financial crisis, the basel committee introduced a leverage ratio requirement : a bank ’ s tier 1 capital to total exposures cannot be less than 3 %. the uk introduced a minimum requirement in january 2016 for the largest seven deposit - takers in the uk. at the same time, with the aim to reduce systemic risk, regulators also supported a shift towards central clearing in derivative markets, where central clearing refers to the clearing and settlement of otc derivative trades through a central counterparty ( ccp ). to support this shift, mandatory clearing for the most liquid forms of otc derivatives was introduced. this meant an entity engaging in these trades and subject to the mandatory clearing requirement would need either to become a clearing member of a ccp or form a clearing relationship with a clearing member. in the latter case, the clearing member would then clear the derivative transaction through a ccp on behalf of its client – hence the term ‘ client clearing ’. the number of clients clearing otc derivatives has increased significantly in recent years, as chart a illustrates. the interaction between client clearing and the leverage ratio arises in two ways. first, the leverage ratio includes exposure arising from potential future exposure on derivatives. however, initial margin posted by clients is not recognised as reducing exposures by the leverage ratio calculation. second, if it appears on the clearing member ’ s balance sheet, client margin increases the leverage ratio exposure. thus