out of core tier 1 capital ( ie equity ) rather than being split equally across tier 1 and tier 2 capital or taken from total capital. also, some risk - weights are increased, for example on counterparty credit risk exposures. together those changes mean that the old basel 2 core tier 1 minimum risk - weighted asset ratio is equivalent to around 1 % on a basel 3 basis. taking into account the capital conservation buffer and the surcharge for systemically important financial institutions, the basel 3 minimum comes to around 10 % for the largest banks. bis central bankers ’ speeches that is on a risk - weighted basis. policymakers need to be confident, therefore, that the risk - weights are determined robustly. leaving banks completely free to choose risk - weights, using internal models, is not safe. it effectively allows banks to determine their own regulatory capital requirements, which hardly fits with society ’ s purpose in regulating banking in the first place. that being so, the introduction of mandated floors on risk - weights should be debated in basel. they are already being introduced in the us. that would be one concrete step to contain the risks from complexity in the current capital accord. the planned basel leverage limit should be viewed in the same light. this is not to say that it would be sensible to rely entirely on a simple regulatory constraint. history teaches us that they do not work on their own – just remember the 1980s ’ latin american and east european debt crisis, which left much of the western banking system perilously close to bankruptcy, notwithstanding the leverage limits applied in the us and elsewhere. on its own, a simple leverage limit incentivises banks to increase the riskiness of asset portfolios. the new basel package is an attempt to use simple measures to put bounds on the consequences of flaws in more complex measures, which were themselves designed to avoid the perverse incentives to hold only very risky assets created by the previous generation of simple measures. more will need to be done in the years ahead to simplify and underpin the basel regime. market discipline can help, but only if there is much more transparency around the drivers of risk weights – both why they change over time and why they differ, for similar exposures, across institutions. the market needs to be able to understand what is published. microprudential supervision under the new uk twin peaks system but the new uk regime will not rely on getting the regulations exactly right. that would be a fool ’ s paradise. effective supervision is

drove the system over the cliff. rather, like others, many were myopic about the risks in the system. innovations in technology, the opening up of the world economy, new markets for transferring risk, and years of smooth growth, apparently attributable to better macroeconomic policy frameworks – all of this encouraged a sense that the world had become a safer place. high actual returns were extrapolated forward into required future returns. add in to the mix, complexity obscuring the risks in the system as a whole. and, although uk policy rates were relatively high for a number of years, accommodative global monetary conditions fuelled a search for yield and underpinned confidence in resiliently liquid capital markets. 2 distorted incentives, myopia, complexity, easy global monetary conditions : a heady mix. and a mix which the prevailing regulatory regime was singularly ill equipped to address, and in some respects had done much to create through inadequate capital requirements and an absence of liquidity requirements. in fact, a toxic mix. when credit markets become overly exuberant, not only do the balance sheets of lenders become stretched, cheap credit leads borrowers to become over indebted, see tucker ( 2012 ), “ national balance sheets and macro policy : lessons from the past ”. bis central bankers ’ speeches raising the probability of default. when defaults eventually pick up, a general awakening occurs, triggering mass deleveraging. this matters to debates about risk measurement and management. it is not simply that the models employed over recent years – notably value - at - risk – make assumptions, such as normally distributed returns, that are manifestly false. 3 it is not just a matter of finding better models, useful though that might be. the problem of exuberance is not simply one of lots of black swans. it is that the collective behaviour of market participants can generate the tail events that sow the seeds of the system ’ s destruction. it can breed swans. what the authorities are doing given the complex mix of factors behind the crisis, it would be surprising if there were a single policy initiative that could make the system safer in future. the response is multi - dimensional. but you will be relieved to hear that at this point i am not going to summarise the whole of the international agenda. 4 i ’ m going to put to one side, for example, the panoply of measures being pursued internationally to simplify capital