This is why the current focus on enhancing banking regulation is right and progress on key reforms to strengthen bank capital and liquidity standards remains a top priority. The recent reform package of the Basel Committee will lead to a much more robust and resilient banking system in the future, with both a stronger capital and liquidity base than before the crisis. The challenge, now, is to calibrate and phase in the new framework in a way that does not impede the recovery and does not contradict our macroeconomic objectives. The macroeconomic assessment of the reforms underway will help us strike the optimal balance. We must also reduce procyclicality. Some of the procyclicality can be trimmed through prudential regulation but I strongly believe that our first line of defense against procyclicality should be the accounting framework. I therefore support the current focus on reducing the scope of the mark-to-market approach and moving from an incurred loss model to a forward-looking model for provisioning. Conclusions To conclude, the main challenge ahead of us is to find the right balance between all these measures and the short-run effects of the rebalancing. If the rebalancing process happens too fast, it might weaken the recovery; but if reforms are delayed too much, the longer-run growth prospects will be affected negatively. One very important issue to focus on while analyzing this trade-off is that policy decisions need to be perfectly coordinated across countries. The crisis has demonstrated that it was necessary, and that it was possible.

Efforts aimed at integrating these markets into regulated and supervised market infrastructures are indeed an essential policy response to risks accumulated in these markets. However, the crisis has not just shown us that we should expand the scope of regulation and supervision. In fact, two clear trends have emerged and are greatly affecting the very nature of regulation. The first observable trend is that we must complement micro-supervision with macrofinancial supervision: this macroprudential approach has in fact developed in many countries. The second trend is that regulation needs to become more global in response to the globalization of finance. In that respect, the commitment by all G20 jurisdictions to implement Basel II by 2011 and to finalize this year a new package aimed at strengthening bank capital and liquidity standards is a great achievement. We are confident that making tangible progress on each of these fronts is an essential response from policy makers to the roots of the global financial crisis. To some extent, the ultimate aim of financial regulation has to do with financing the real economy. Sound regulation should enable the stable provision of financial services to economic agents as they strive to finance their productive investments and consumption, which constitute the fuel for growth. Banks are central to the financing of economic activity because they perform maturity and liquidity transformation as well as a credit risk screening function. This is  BIS Review 93/2010  3  especially true in continental Europe, where they are responsible for more than 80% of financial intermediation.