The way that we calculate capital requirements is one of those embedded assumptions that has existed for so long that we fail to think about whether it really makes any sense or not. And if you do stop and take a step back, you will realize that it actually does not necessarily make much sense.
We calculate capital requirements looking backwards, when the thing that we will need capital for is in the future. That backwards capital requirement is only broadly close to being correct for firms that always do tomorrow what they did yesterday.
So what will we do tomorrow? Not entirely sure, especially regarding risk. Especially if you do not have a risk management program.
Oh, but you say that you do have a risk management program. Well that changes every thing. Because one of the most important features of a risk management program is that you have made plans to enforce boundaries on your future risk taking. So at the extreme, you will need capital for the amount of risk you would have at those boundaries.
It sounds very different from what we have been doing. It is a quite troubling idea for firms whose limits are sky high, or who do not have a history of actually enforcing their limits.
But aren't those the firms that need more capital?