##judging risks. but when a shift in risk appreciation and pricing occurs, the reinsurance industry often separates the run off of old portfolios containing mispriced contracts from the establishment of new vehicles, capitalised separately to take advantage of attractive terms on new business. and for regular insurance, many contracts are annual, so adversely priced business can run off fairly quickly. banking typically works quite differently. banks around the world are carrying portfolios of term loans that are the legacy of the boom years. there is uncertainty – amongst banks ’ management, shareholders and funders – about the degree of fundamental impairment in those portfolios. new loans are booked to the same balance sheets. and so many banks face a choice between, on the one hand, conserving capital and liquidity to support legacy portfolios ; and, on the other hand, deploying capital and liquidity to write new business on what some see as the attractive terms and conditions now available. the banking system simply is not structured routinely to insulate new business from the legacy of past mistakes ; funding and capital are fungible. this predicament may be exacerbated by other features of the current environment. one is an apparent reluctance on the part of banks to raise fresh capital except where the market thinks that it is beyond doubt that they need to do so. given the feedback from credit conditions to asset prices and the real economy and so potentially to banks ’ future earnings, it might seem slightly odd for banks internationally to be maintaining distributions to shareholders but tightening credit availability in order to preserve resources. this has to be seen in the wider context. one possible explanation for banks holding back from raising fresh capital is that they may want to avoid giving an adverse signal about themselves. if there is a co - ordination problem, the regulatory authorities internationally should be able to tackle it, allied to ensuring prudent valuations of legacy portfolios. but another possible explanation is that, like some other market participants, bankers may believe that many legacy assets are fundamentally undervalued at present and that the markets for securitised assets will, with time, recover and reopen. on that view, banks are avoiding becoming overcapitalised on a fundamentals ( or forward looking ) basis, and so setting off another expansionary phase in the credit cycle, a little further down the road. the serious puzzle which that underlines is why there is a dearth of buyers for the supposedly undervalued paper.

sam woods : brave new world speech by mr sam woods, deputy governor for prudential regulation of the bank of england and chief executive of the prudential regulation authority ( pra ), at the association of british insurers, 16 march 2021. * * * thank you for the invitation to speak today, and for coming along to this session. although i can see nobody on my screen the abi assures me that an implausibly large number of leaders of the insurance industry are in fact present, and that some of you may even be listening to this speech. as a prudential regulator we oversee a large and vibrant insurance sector supplying vital financial services to the wider economy. i will not bore you with another list of the magnificent variety, size and importance of those services – that is the job of the abi. but safeguarding the stability of their supply is the whole point of our role. that role is about to change in two ways. first, the solvency ii review is well under way – i will come back to that. but i want to begin with the second change, which is more fundamental – the proposed reforms to the architecture of financial regulation as we enter the brave new world of post - brexit britain – and explain why we favour a shift towards more rule - making by the regulator, and the enhanced accountability that needs to come with that. the future regulatory framework : rules and statutes now you may be thinking : “ quelle surprise, the regulator wants to have more control over the rules! ” in fact, i can tell you that the pra has no pro - active desire to increase its responsibilities. we have enough on our plate already. it ’ s just that it seems clear that, for our market, putting the details in the regulator ’ s rules rather than in statute ( as the eu typically does ) is a better approach. i say better for our market, but in fact this is the norm in all major jurisdictions apart from the eu and switzerland. as a point of principle, it is consistent with the established model of an independent regulator taking time - consistent decisions in pursuit of long - term objectives given to it by parliament. this follows the same logic as the arrangements in this country and many others for setting monetary policy. and on a purely practical level, it ensures that rule - making is closely informed by the day - to - day risk assessments that we have to make as supervisors. this approach also helps ensure that rule -