And there is evidence that experiencing natural disasters can affect financial risk taking – one study found that CEOs who experienced the extreme downside of natural disasters behaved more conservatively across various corporate policies. Another found that the purchase of earthquake insurance rose after a quake despite the probability of a subsequent large quake falling because stress on the fault line has been relieved. 10  One plausible hypothesis, therefore, is that the current high level of hurdle rates relative to the risk-free rate and lower costs of financing reflect, in part at least, both greater uncertainty – i.e. greater perceived risk – and greater aversion to risk. This higher hurdle rate risk premium is in addition to the higher debt and equity risk premia embodied in the cost of external financing of investment. It may have led to underinvestment more generally, even among those firms that reported that they had invested appropriately. Investment and economic outlook  If this is right, and there is currently an elevated hurdle rate premium driven by uncertainty and greater risk aversion, how persistent will it be? Will it fade over time as memories of the crisis recede? Or if and when risk-free rates begin to rise will hurdle rates move up to reflect the higher premium? This will have important consequences for the rate of investment in the future. In the near term, in the Bank's latest economic forecasts published last week, business investment is expected to remain very weak before picking up.
Average annual growth in business investment in the decade before the crisis was 2.4% and in the 15 years before the crisis it was 3.6%. 2  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  One reason for this weak investment since the crisis has been weak demand. Over a run of years, the rate of investment should adjust to maintain the capital stock at a particular level relative to GDP. If GDP grows more slowly, less investment is required to maintain the capital stock at a desired level relative to GDP. This can lead to a vicious circle in which weak demand leads to lower investment that in turn impairs the productive capacity of the economy. This in turn impairs demand as households and businesses revise down their expectations for future income and profits and so on. So what starts as a demand shock can end up as a supply shock. According to the IMF, this effect probably accounts for some of the weakness in investment in advanced economies. 3  But this is unlikely to be the whole story behind the weakness of investment post crisis. One common and repeated candidate explanation is the lack of finance for productive investment. This is not a new issue; it has very deep roots in the UK. The role of banks in providing finance to businesses for investment has been examined many times since Charles Geach’s day.