regime. and second, that while the pra has done a reasonable job in steering everyone across the implementation line, it has in the view of some parts of the industry been over - zealous in places. i ’ ll comment on each of these themes in turn. solvency ii indigestion i very much agree that having another big meal at this stage would be most unwise. however, i acknowledge that the size and variety of the solvency ii meal has left all of us facing some degree of indigestion. when faced with live market conditions and commercial realities, some aspects of the regime have been found wanting. so i agree with most industry commentators that it is in nobody ’ s best interests – not firms, policyholders or regulators – to make wholesale changes. but that does not mean that we cannot make a series of tweaks and improvements to the overall system, by way of a digestif. all speeches are available online at www. bankofengland. co. uk / speeches for example, there has been considerable criticism of the risk margin - a new feature of solvency ii which aims to allow for uncertainty in liability valuations - and i agree that its current design and implementation does not achieve the intended goals. the concept of a risk margin is a sensible one, but its current implementation in solvency ii is flawed. because the root causes of the problems are baked into european legislation, we need to fix them at source, and are actively and constructively engaged with our european colleagues to design a more sensible solution. some firms would like us to ‘ break glass ’ and implement a unilateral quick fix here in the uk. but i think that would be a mistake at this stage, not least because in the short - term there is a mechanism available to firms to mitigate the impact on business written before the introduction of solvency ii, namely the transitional measure on technical provisions, or tmtps. we have allowed all firms that applied and qualified to use this measure. and data reported to us by firms indicates that the tmtp benefit across the life industry at the inception of solvency ii almost entirely offset the aggregate risk margin. i will also reiterate a point i ’ ve made previously, which is that when we consider whether or not firms are in a position to pay dividends, one of the main quantitative yardsticks we use is capital levels after the benefit of transitionals. in other words, we regard

companies, shareholder capital or equity is used to finance the acquisition of assets. the same is true for banks. equity finances the provision of loans to households and companies, and those loans are the banks ’ assets. in that sense, capital supports lending by banks and does not substitute for it. higher capital requirements ensure that enough of the finance raised by banks is in a form that can absorb losses without the banks failing. higher levels of capital enable banks to attract other non - capital funding, in turn making it easier for them to lend to households and businesses. at present it is the better capitalised banks that are expanding lending. how well are the banks doing in building resilience? there is good news here, as the banks have strengthened their capital positions since the darkest days of the crisis. but there is further to go. these capital positions are most often measured by the ratio of capital to riskweighted assets. risk is difficult to measure, but i think that we must continue to do this, albeit accepting the uncertainty in the process by using a healthy dose of scepticism, and aiming to keep the bis central bankers ’ speeches method of measurement as simple as we reasonably can. but it is helpful to back up the riskbased measure with a leverage ratio that simply measures capital as a proportion of assets. in the lead - up to the crisis, banks around the world chronically underestimated the risks to which they were exposed. the consequences were dramatic and highly damaging, and we are still living with them today. the crisis has been fundamentally a product of banks that grew rapidly and failed to back that growth with sufficient capital to bear the losses. the fpc has recommended that banks should ensure that they take the necessary steps to put our system in a place where it can support the economy without compromising its stability. the bank of england has taken steps to extend the funding for lending scheme, and within that has acted to provide a clear incentive to stimulate lending by banks to small firms. but banks that are short of capital cannot increase lending. that is why in march the fpc made a series of recommendations to ensure that uk banks are well capitalised, and that banks meet that requirement in a way that does not hinder lending to the economy. you may be assured that we are determined that the newly formed pra follows through on those recommendations. bis central bankers ’ speeches