In short, I think that the regulatory system was not conducive to adequately measuring the significant risks taken by institutions; to providing the necessary incentives for controlling them; to ensuring sufficient capacity for absorbing losses when they materialised; and, finally, to avoiding contagion to the sector and to the economic system as a whole with the subsequent adverse consequences on public finances, growth and unemployment. In response to these deficiencies, the main international authorities have agreed and, in some cases, already implemented important reforms affecting nearly all significant aspects of financial activity. Allow me today to focus on what I consider are the three pillars of global regulatory reform of the credit sector: first, measures to strengthen the solvency of banks; second, reforms to facilitate the orderly resolution of non-viable institutions; and, finally, the structural measures to set limits on credit institutions’ business model. BIS central bankers’ speeches  1  Solvency legislation Let us begin with the solvency rules. The new solvency rules, known as Basel III, introduce significant changes in prudential requirements which envisage not only an increase in the amount and quality of capital required, but also supplementary prudential oversight aimed at strengthening the resilience of banks and the financial system as a whole. This new framework has been incorporated, as you know, into European legislation through the Capital Requirements Directive and Regulation which will be implemented on 1 January 2014. Basel III includes far-reaching changes. First, it requires banks to considerably increase their loss-absorbing capacity.

The basic instrument used is the introduction of a minimum level of top quality capital (core capital or common equity tier 1) which amounts to 4.5% of riskweighted assets. On top of this minimum, an additional capital conservation buffer of 2.5% is introduced, which must be built up once the transition periods envisaged have ended, although it may be used in times of need. Thus, banks, as a rule, will have to maintain a minimum level of top quality capital of 7% in terms of their risk-weighted assets. This CET1 capital ratio is calculated, furthermore, using more stringent criteria than those currently used. Thus, the admissibility requirements for eligible instruments have been made significantly more restrictive and deductions have been increased; for example, those relating to goodwill, qualifying holdings and deferred tax assets. For an idea of the overall impact of these measures, it suffices to say that the minimum CET1 requirement of 2% under the previous legislation could be, on average, around 1% if the new requirements are applied. Therefore, effectively, the minimum CET1 requirement, increases by around six percentage points in relation to risk-weighted assets. And this aside from the supplementary requirements which may be made of each institution based on its specific risk profile under the so-called Pillar 2 of the Capital Accord. In this way, credit institutions will have more and better quality capital to withstand the losses which might be caused by their activity.