6  7  All speeches are available online at www.bankofengland.co.uk/publications/Pages/speeches/default.aspx  7  A related point is that not all reductions in uncertainty are beneficial. In particular, guaranteeing what firms themselves see as the worst case outcome (in the simple model that would mean setting q = λ = 1) is unlikely to improve matters even if it “resolves the uncertainty”. Quite the opposite: it would mean only that projects that have so far been postponed, precisely for fear of such an outcome, would then be cancelled for good. Another set of implications arises from the expected duration of the uncertainty (E[T] = 1/q). It’s helpful in this respect to re-express [2] as follows: E[T] (R – ρ) ≥ λL  [3]  Writing the result this way makes its interpretation that much more intuitive. On the right-hand side is the benefit of waiting until the event is realised, i.e. the (probability-weighted) loss the firm could thereby avoid. On the left-hand side is the cost of waiting, namely the excess return the investment would earn in the meantime. And the longer the wait (the higher the expected duration of the uncertainty E[T]) the greater the foregone income is likely to be. If the firm expects a really long delay before the news comes through (high E[T], low q) it might well decide it just has to get on with things and make the investment anyway.
Finally, we have to do our best to ensure that market discipline is exercised in a relatively benign and gradual way – graded differentiation of spreads on debt for example, rather than sudden refusal by the market to rollover debt at any price. This means we need to think hard about the frequency as well as detail of disclosures, and specifically the trade-off between the two. Too frequent disclosure might not only be too onerous but also add to the volatility of company ratings. Too long and the potential for large step changes in an institution's risk profile will increase market uncertainty and volatility. Of course, there may be times when this cannot be avoided – the sudden emergence of fraud for example – which is where crisis management by the bank concerned and by the authorities comes into play. But we should not overemphasise the relevance of these new disclosure initiatives in this particular sort of situation: publicly owned banks are after all already required to disclose any information which could significantly affect their share price. BIS Review 43/2001  3  Impact of the New Basel Accord Turning to the Basel proposals on minimum capital, their aim is to align regulatory capital much more closely with risk. This should have financial efficiency benefits, as I explained just now. To the extent that seriously undercapitalised risk taking by banks will in the future be more difficult, there are also clear financial stability benefits.