We decided instead to use top-down assessments of solvency based on market valuations. That pointed to a capital deficit for UK banks of around £ billion, well in excess of others’ estimates. When UK banks were finally recapitalised that Autumn, around £ billion was injected into them by the UK Government. Our calculations had been roughly right, good enough to save the ship. To this day, I believe that if greater amounts had been injected then – perhaps £ billion? - UK banks would have been more willing to lend and the recovery would have been less anaemic. It would have been better to be super-safe ex-ante than super-sorry ex-post. With the ship stabilised, in the UK and globally, the task now was to make it seaworthy. The Overton window of opportunity to affect radical regulatory reform was ajar. But what reform? Having helped explain the dynamics of a complex web during the financial crisis, complexity science could also help in its redesign. Although these regulatory reforms eventually fell short of my up-front ambitions in their scale and scope, they nonetheless moved the system to a decisively better place. The centrepiece of these banking reforms was so-called Basel 3, overseen by the Basel Committee on which I sat.21 The Basel 3 reforms eventually resulted in significant increases in the amounts of capital banks held; the introduction of an international regime for leverage and liquidity; a capital surcharge for the world’s “super-spreader” banks; and a system of counter-cyclical capital regulation to modulate credit cycles.
As best I can tell, no-one got the crisis completely right, despite a number of people subsequently exhibiting supernatural powers of hindsight. Rather, the crisis illustrated the limits of our collective knowledge, our collective lack of imagination. It demonstrated that, in a world of uncertainty as distinct from risk, it is better to be super-safe ex-ante than super-sorry ex-post, better to be roughly right than precisely wrong.20  18  A more developed version was published in Nature, written with the late Bob May (Haldane and May (2009)). Haldane (2009). 20 Kay and King (2021). 19  12  All speeches are available online at www.bankofengland.co.uk/news/speeches and @BoE_PressOffice  12  The latter comes to mind when reflecting on the initial rescue response to the crisis. For me, one of the decisive moments came early in 2008 when, led by Mervyn King, the Bank judged that the problems facing the UK and global banking systems were ones of solvency, not illiquidity. Righting the system meant restoring the solvency of banks through capital injections. This was a big call. But how much more capital was needed, given the degree of uncertainty (not risk) about the true value of UK banks’ assets? This was the problem Mervyn set for my Division. One approach to answering it was to assess capital shortfalls bottom-up, asset by asset. As UK banks had an asset base of £ trillion, much of which they themselves could not value, this was practically impossible. In even trying, we would probably have been precisely wrong.