If we use a real discount rate of 2.5% a year, the present value of a permanent fall in output of 3% is in excess of 100% of current annual GDP. This is at the high end of estimates of the cost of higher capital requirements. Recent analysis by economists from the National Institute of Economic and Social Research (NIESR), commissioned by the FSA, puts the present value of the costs of permanently raising capital requirements by 1% at approximately 2.7% of current GDP 3. And illustrative estimates in the most recent Bank of England Financial Stability Report (FSR) indicate, under certain conservative assumptions, that the long run costs could amount to 4% of current annual  2  “Interim Report on the Cumulative Impact on the Global Economy of Proposed Changes in Banking Regulatory Framework”, Institute for International Finance, 2010. The report assumes: a three-fold increase in the risk weights assigned to trading book assets; a 2pp increase in the minimum Tier 1 and overall regulatory capital ratios, to 6% and 10%, respectively, to take place at the end of 2012; capital redefinition effects including exclusion of minority interest from Tier 1; higher holdings of liquid assets as a result of the minimum Liquidity Coverage Ratio being increased; a greater reliance on longer-term over short-term wholesale funding, as a result of the Net Stable Funding Ratio at 100%.
The alarm bells ring for us when we are told that the CEO or other Senior Executives are very sensitive to challenge;  3.  so we as supervisors depend on Non-Executives, under the leadership of the Chair, to challenge the Executive in all aspects of the firm’s strategy, which includes the viability and sustainability of the business model and the establishment, maintenance and use of the risk appetite and management framework. We also of course rely on the Non-Executives to mentor and coach the Executives and balancing this with the essential ability to challenge is a vital component of an effective Board. In the terms of the Senior Managers Regime, this frames the responsibility of Boards. But, as many Board members have said to me, if only it was that simple, but you have made it so fiendishly complicated. Well, actually we didn’t make it fiendishly complicated, finance has become that way itself – we didn’t invent exotic derivatives. There are those who think the answer is to make finance less complicated, but in the real world there are benefits to innovation if risk management is effective. So, how do we square the responsibilities with the complexity? Not by drowning in complexity, or by doing a Canute and trying to tell it to go away. For Boards it means having a certain level of understanding, not at the level of the maths of a Copula.