All of that should mean that firms face a more balanced choice between incurring the costs of specialist climbing equipment to climb a particularly steep bit of the mountain and strolling up a somewhat gentler hill instead. The mountain guide The consultation we’ve launched today introduces a new Supervisory Statement to make it much clearer how our expectations change over time for banks as they grow from ‘new’ to ‘mature’. Whilst most of this reflects how we have supervised firms in practice over the past few years, we have brought it all together for the first time so that the mountain path ahead is clear to you all. I won’t set out the entire supervisory regime now. But I did want to draw your attention to three changes introduced by the CP, all relating to capital, and which are designed to deliver a clear path from being a new bank at base camp to being established and on the way to the summit.   First, we are proposing to update how we calculate the capital buffer requirement for new banks. To date this has been based on an unspecified wind down cost calculation. But interpretation by banks has (understandably) been inconsistent, so we are proposing to move to a clear and consistent policy of setting the buffer as six months of operating expenses. This should be enough to allow banks time to find alternative sources of capital or to change their business model if investor support is lost.
The relationship between economic activity and the labour market Each economic cycle is unique, which became particularly clear during the most recent economic downturn. However, there are some patterns that often recur in economic cycles and forecasters have therefore often used them as a base in their forecasting work. For example, it is normal that changes in activity in the labour market occur with some time lag compared with changes in production. This is mainly because it is expensive for companies to adjust production to a new demand situation and to employ and give notice to staff. Firms may therefore initially choose to wait and see whether the change in demand is temporary. This means that the first thing to happen in an economic downturn is that productivity growth falls. Firms gradually adapt to the new situation by reducing the number of hours worked without reducing the number of employees. However, if the downturn is long-lived, the personnel force is also downsized over time. The time lag between GDP and the number of hours worked is usually one quarter in Sweden, while the time lag between GDP and employment is usually twice as long, that is, six months. A well-known relationship between economic activity and activity in the labour market was formulated by Arthur Okun in the early 1960s. 1 This describes a negative relationship between GDP growth and changes in unemployment, which has become known as “Okun’s law”.