would be a mistake to think that a 5 % capital buffer is always and everywhere the right one. so the third part of our approach is flexibility. flexibility to raise capital buffers if the threat of future losses grows, and cut them again if those threats materialise or recede. that flexibility avoids what might otherwise be a need to capitalise the system for the very riskiest times, all the time. it avoids taking unnecessary risks of holding the real economy back. there will be times when risks are heightened and so to protect the economy, banks should have bigger capital buffers. broadly, we are seeking to match the size of those buffers – the strength of defence – to the threat of future losses as they change over time. 14 but how will we know the threat level has changed? the bank of england has called on the european commission to revisit such rules in the european capital requirements directive iv. the bank ’ s response to the commission ’ s call for evidence is http : / / www. bankofengland. co. uk / financialstability / documents / regframework / detailed available at answers010216. pdf the 8. 5 % minimum is composed of 6 % common international standard agreed under basel iii plus the 2. 5 % pillar 2a requirement that reflects shortcomings in risk measures. see footnote 3. we plan only for only the systemic part of the banking system to have a 5 % buffer. in line with basel standards, smaller banks will be subject to a buffer only half the size. that reflects the difference in economic costs between a big – systemic – bank coming close to or actually failing and a small bank doing so. this will take effect by supplementing baseline capital requirements with the countercyclical capital buffer rate on uk exposures. bis central bankers ’ speeches we ’ ll be looking for the evidence that borrowers might have overstretched ; that asset prices could be vulnerable to reversal ; and that economic imbalances exist that could correct. assessing risks isn ’ t the same as “ calling the cycle ”. we shouldn ’ t be asking whether a downturn or a bad event is destined to happen. we are not looking for irrefutable proof. capital buffers should be based on whether the evidence says there is a threat that could materialise in future, not whether it is going to. the most interesting thing i heard a senior policymaker say about the financial crisis, not a bank of england policy

set up covering attestation, widening investment flexibility, and making the ma calibration more risk sensitive through the use of credit rating ‘ notching ’ [ 17 ]. i would like to thank all those who have participated in the over two dozen meetings so far, for the broad range of information they have provided, for the lively discussions and particularly for generating constructive options. it is important that we are able to discuss and understand the technical issues, and such open dialogue will improve the policy - making process. the subject expert groups have helped reduce the risk of there being surprises to insurers when we consult on proposals later this year. but we are not front - running the consultation, which will be public and open to all respondents, industry and wider stakeholders in the sector. building on this approach, next month we will be convening a similar group to think through detailed principles for the stress testing regime, and we are also putting together a group of expert users of insurers ’ disclosures which i ’ ll come back to shortly. the supervisory measures set out by hmt are not independent of the wider operating environment. rather there will be a strong interplay between market forces, firm behaviour, regulatory requirements, and the increasingly important role that disclosures will play to promote market discipline. this interplay will become even more relevant as the bpa market continues to grow and mature. indeed, market discipline via greater disclosure has also been brought to the fore by the solvency uk package. the disclosures required on stress testing together with the publication of individual firm results will provide a transparent independent measure of firm resilience to the markets. this will benefit all stakeholders including both advisors to db schemes and scheme trustees when seeking to transfer liabilities to the insurance sector. for insurers, greater transparency could contribute to reducing the cost of capital, opening more opportunities for firms with stronger financial positions to benefit from the expanding market. in the banking sector, published stress tests for our largest banking groups have delivered greater transparency, better diagnosis of where weaknesses are, and a much deeper ability to compare the strengths and weaknesses of different business models, allowing counterparties and capital providers to make better informed judgements about counterparty risk when contemplating a transaction [ 18 ]. hence there should be a strong built - in incentive within the system to do disclosure well and for us as regulators this would be a sign of a market functioning efficiently. that ’ s why i ’ m keen we engage with current and prospective users