confusing in one respect, namely that you might – but basel doesn ’ t – describe this as a maximum leverage ratio ). the pra is in discussion with the banks on the issue of capital. i read a lot on this most days of the week. let me make a few points. many commentators and journalists have worried publicly that these recommendations will lead to lower bank lending. i want to reassure you, that is not the case. capital is not money that has to be stashed away for a rainy day. essentially, it is the shareholders ’ stake in the company. in non - financial 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. in that sense, additional capital supports lending by banks and does not substitute for it. higher capital ensures that enough of the finance raised by banks is in a form that is capable of absorbing losses without the banks going bust. much of the discussion on capital is couched in terms of a ratio to risk - weighted assets. but another more basic yardstick of a bank ’ s ability to withstand losses is the leverage ratio. this is simply the bank ’ s capital expressed as a proportion of its assets. so a further test that we should consider is whether banks are making acceptable progress towards the basel 3 minimum leverage ratio. basel 3 requires that banks have leverage ratios in excess of 3 %. in asking banks to have a larger share of equity on their balance sheet, we are for the most part dealing with legacy issues. the whole point of this exercise is to move more rapidly to put the past and its problems behind us. this emphasis on legacy explains why it is possible to want more capital to back old risks while easing the capital requirements on new lending to the real economy. frankly, this is about convincingly putting the past behind us. we have not yet released numbers on the capital requirements for each bank. at the end of march, the fpc – consistent with its remit – announced that uk banks had around a £25 billion capital shortfall against the 7 % basel 3 yardstick. to be clear, that £25 billion referred to the shortfall in banks ’ balance sheets at the end of 2012. and at the time of the fpc ’ s announcement, i said that firms had already made plans to deal with half of the £25 billion number. the pra has translated all of that into firm by firm

andrew bailey : challenges of prudential regulation 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 society of business economists annual dinner, london, 3 june 2013. * * * thank you for inviting me this evening – it is a great pleasure to have this opportunity and particularly at a time when we are embarking on major reforms to policymaking in the area of financial regulation. the financial crisis has provided hard lessons on what happens when the stability of the financial system is found wanting. it has reminded us how much we depend upon the supply of critical services from banks, insurers, investment firms, asset managers and other parts of the financial sector. if you take the banks as exhibit one, there is good reason to curse them, but at the same time recent experiences have only served to emphasise how much we depend upon them, like it or not. the new legislation on financial regulation in the uk emphasises the importance of the continuity of supply of critical financial services. this is a permanent public policy objective, and rightly so. i use the term “ permanent ” deliberately to distinguish this objective from the support provided by too big / important to fail, which should not be permanent. the financial policy committee of the bank of england, the fpc, has the task of identifying, monitoring and taking action to remove or reduce risks with a view to protecting and enhancing the resilience of the financial system in the uk. these risks at the level of the system can include those arising from structural features of financial markets, from the distribution of risk within the financial system, and from unsustainable levels of leverage, debt or credit growth. the emphasis here is very clearly on ensuring the resilience of the financial system. but our objective is not to achieve resilience at any cost – our actions must not have a significant adverse effect on the capacity of the financial sector to contribute to the growth of the uk economy in the medium or long term. moreover, and here you will recognise the symmetry with the objectives of the mpc, the legislation provides that, subject to achieving our primary objective for financial stability – resilience – the fpc must also support “ the economic policy of her majesty ’ s government, including its objectives for growth and employment ”. the reforms have also created the new prudential regulation authority as part of the bank of england. here, the