complicated, but in the real world there are benefits to innovation if risk management is effective. so, how do we square the responsibilities with the complexity? not by drowning in complexity, or by doing a canute and trying to tell it to go away. for boards it means having a certain level of understanding, not at the level of the maths of a copula. the key challenge for all of us is to be able to boil the complexity down to understand what are the key drivers – which judgements are likely to matter when bad things happen in the tail of the distribution of risks. this is a description of one of the hardest things in many walks of life – how to explain complex things in simple terms. in the bank of england, it is a challenge we face regularly in terms of bis central bankers ’ speeches explaining complex areas of public policy – it ’ s the same issue for our judgements on monetary policy. so, let me put forward a proposition for boards. it is the job of the executive to be able to explain in simple and transparent terms these complex matters to non - executives. in doing so, you should understand the uncertainty around judgements, in what circumstances they could be wrong, and how there can reasonably be different ways to measure things like liquidity. non - executives should not be left to find the answers for themselves, and they should not feel that they have to do so out of a lack of sufficient confidence in what they are being told. in other words, they should not be pointed towards the haystack with warm wishes for the search ahead. let me give an illustration of this in a highly topical area for banks and insurers, internal risk models. what does a board need to understand? try the following : • key elements of model design ; • significant assumptions and expert judgements ; • key sensitivities ; and • significant limitations and uncertainty in the model. to restate, the challenge is to reduce complexity to simplicity, so that board members feel that they understand : • where is the model expected to work well ; • in what circumstances is it likely to break down ; • is the overall model output credible ; • what “ moves the dial ” in terms of key assumptions or judgements ; and • are those assumptions and judgements reasonable? non - executives should be put in a position to possess a general understanding of the model and meet these expectations without detailed technical knowledge. that ’ s the job of the executive, to explain

andrew bailey : governance and the role of boards speech by mr andrew bailey, deputy governor of prudential regulation and chief executive officer of the prudential regulation authority at the bank of england, at the westminster business forum, london, 3 november 2015. * * * it is a pleasure to be speaking at the westminster business forum again. i am going to use my time this morning to set out some thoughts on how at the pra we are thinking about the role of governance and boards in the prudential supervision of deposit takers, insurers and major investment firms. we work very closely with boards, more so than in past approaches to prudential regulation, and i find it a very important, constructive and informative engagement. there is a lot of focus at present on the senior managers and certification regime which will be implemented by next march, and on the proposal before parliament to change one element of the test, namely the presumption of responsibility. this morning i am going to focus on the substance that underpins the regime. also, i am not for the most part going to comment on the issue of diversity in board membership, but not because i think it is unimportant, far from it. the best place to start is the objectives given by parliament to the pra, namely the safety and soundness of firms that we supervise, the protection of insurance policyholders and our secondary objective in respect of competition, best described as requiring us to act in respect of the implications for competition of our own actions and inactions but only to the extent that we are not undermining our primary objectives. at the heart of what we do in the pra is risk assessment. understanding how firms take and manage risk, the controls they have and the quality of risk management, is at the heart of the job of a prudential supervisor. that ’ s what we do every day, and the standards of this work have been raised extensively since the crisis, which was very necessary. i never tire of saying that the pra is a judgement - based supervisor, by which i mean the application of judgement against a framework of rules and regulation. as mark carney said recently in the context of the european union, from which the largest part of our framework of rules and regulations comes : - “ ensuring the bank of england has the instruments necessary to achieve its financial stability objective will depend on the eu continuing to have regulations of the highest standards, which strike the appropriate balance