echoes of melville | speeches | rba leading media around the world ( graph 7 ). the sources of this uncertainty are well known. the long list includes the trade and technology disputes between china and the united states, the brexit issue, the ongoing tensions in the middle east, the problems in hong kong and the tension between japan and south korea. not surprisingly, these events are making businesses nervous and they are responding by putting off investment decisions. many would prefer to wait until some of the uncertainties are resolved before proceeding. graph 7 as important as these current geopolitical tensions are, they are not the full story. businesses face a range of other significant uncertainties, including from the rapid pace of technology change, increased competition as a result of globalisation and ongoing changes to regulatory arrangements. it is probable that the uncertainties generated by these structural changes are interacting and being amplified by the geopolitical issues. in this context, it is worth noting that despite the marked decline in global interest rates ( and some decline in the cost of equity ), average hurdle rates of return for new investments in many countries have not changed much ( graph 8 ). it seems that there is a global norm for hurdle rates somewhere around the 13 to 14 per cent mark and it is hard to shift this norm, even at record low interest rates. https : / / www. rba. gov. au / speeches / 2019 / sp - gov - 2019 - 10 - 29. html 11 / 18 10 / 30 / 2019 some echoes of melville | speeches | rba graph 8 there are a couple of possible explanations for this. the first is that the reduction in the cost of borrowing has been offset by a rise in the required risk premium due to the uncertainties that i spoke about. if this were so, the hurdle rate would be unchanged, with lower interest rates just compensating for the riskier environment. the second possibility is that some firms have been slow to adjust to the new reality of low interest rates. we hear reports that a hurdle rate of return of 13 to 14 per cent has been hardwired into the corporate culture in some companies. changing this hard - wiring is difficult and time consuming. however, from our liaison with australian companies, we do know that some companies have lowered their hurdle rates and this is opening up new opportunities for them. it would be good to hear more such reports. my view is that there is an element of truth to both explanations : risk premium

, the risks from fluctuations in interest rates, exchange rates, equity prices and commodity prices. the new guidelines become effective at the beginning of 1998. the novel feature of the market risk guidelines, which were developed by the basle committee on banking supervision and are being adopted internationally, is the reliance they allow to be placed on banks ’ own risk management systems. banks have the option of using their internal models to calculate required capital, or of employing a standard model specified by the basle committee. of course, internal models need to meet certain minimum standards - - both quantitative and qualitative - - before they will be accepted for supervisory purposes. a bank whose systems are not up to scratch will have to use the standard model. the rba must sign off on the adequacy of internal systems. but the onus for effective day - to - day risk management will remain squarely with the boards and senior management of banks. as an aside, during the past year we introduced arrangements under which a bank ’ s chief executive, with the endorsement of the board, must attest to the rba that all key risks have been identified, that systems have been designed to manage those risks, that the descriptions of those systems held by the rba are current and that the systems are working effectively. we are already seeing important general benefits from these new arrangements. they have resulted in more high - level attention to risk management systems and the system descriptions provided to us. chief executives now need to see those manuals, which were previously often regarded as an administrative inconvenience for officers handling liaison with the rba. this has added discipline and rigour to the whole risk management process. eleven banks have applied to us for internal model status under the market risk rules, and they are all presently upgrading their existing risk measurement and management practices to meet the minimum requirements. as well as to measurement methodology, they are giving attention to such features as the adequacy of separation of front - and back - office operations, procedures to ensure that traders deal only in products for which robust operational and legal arrangements are in place, the rigour of revaluation processes and procedures for stress testing and back testing. we remain hopeful that, by the end of the year, all internal models will have reached a standard with which we can be comfortable, but there is a good deal of work still to be done in some cases. another eleven banks plan to use the standard model for market risk, while the remainder