However, recent empirical estimates for the UK suggest the effect is qualitatively present with the increase in banks’ overall funding costs due to higher capital requirements lower than in the absence of the theorem by 45% (Miles et al 2013) and 53% (Brooke et al 2015). 11 For example, the now defunct authority regulating the US Government-sponsored mortgage agencies stress tested them to only an 11% fall in house prices – a more severe shock than any nationwide house price decline to be found from 1945 onward. The peak-totrough fall of 11% was calibrated based on house price data for the West South Central Census Region between 1984 and 1993. Frame et al (2015) show that an alternative scenario based on realised post-2006 data would have revealed that Fannie and Freddie’s capitalisation was much weaker than what the original stress tests suggested. It wasn’t only regulators who made the mistake of relying on the recent past only. During a week when Goldman Sach’s Global Equity Opportunities fund lost 30%, Goldman’s chief financial officer famously stated: “We were seeing things that were 25-standard deviation moves, several days in a row.” His focus was too narrow. While the moves in 2007 were substantial, they were not unprecedented. Even within the last thirty years, equity prices had experienced larger single day falls than they did during 2007. 12 Danielsson et al (2016) show that systemic risk indicators constructed with market data were low and falling before the stress events in 1997 and 2008, and shot up during the events.
José De Gregorio: IMF challenges and policies for the global economy Statement by Mr José De Gregorio, Governor of the Central Bank of Chile, speaking on behalf of the Southern Cone Countries of Latin America International Monetary and Financial Committee Meeting, Washington DC, 24 September 2011. *  *  *  In the past few months, the near-term prospects for the global economy have worsened significantly and financial risks have increased. What some time ago was a modest, albeit unbalanced recovery, risks turning into a new economic downturn, particularly in major Advanced Economies (AEs). This new scenario poses urgent challenges to the IMF and to the membership in terms of decisive political and policy responses to solve fundamental weaknesses and mitigate the negative impact of this new downturn. Against this backdrop, the Fund’s surveillance capacities, and a well-functioning International Monetary System (IMS), are being and will again be put to the test only a couple of years after the 2008–2009 Great Recession and financial crisis. I. The immediate challenges ahead and the fund’s policy advice  Two forces are influencing each other and weighing down on economic prospects in major advanced economies. On the one hand, uncertainty and volatility have increased to their highest levels since October 2008, constraining credit and leading to more cautious behavior by households and financial institutions.