It is now apparent that the level and quality of pre crisis capital in the banking system has not been adequate for the types of losses that have been experienced and that are expected to materialize from the broader economic downturn. Larger capital and liquidity buffers are necessary especially for trading activities. In the Basel framework we have recently taken decisions which will lead to a much more robust and resilient banking system in the future, with both a stronger capital and liquidity base. 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. In the long run, we want stronger balance sheets in the banking system. In the immediate future, disorderly deleveraging is one of the main downside risks to the recovery process. Striking the right balance, in our actions and in our communication, is important, but difficult. The top-down assessment underway in the context of the Basel committee and the FSB is trying to reach that balance. The broader point here is that the proposed reforms can have significant macroeconomic consequences and these should be factored in when designing and implementing them. While the crisis has clearly had global ramifications, its impact on financial systems was not uniform across the world. Differences in financial structures do matter. Banks remain central in our financial systems: this is especially true for continental Europe where they are responsible for more than 80% of financial intermediation.

But, the position and role of even smaller or medium size actors may also put them in a situation to have a strong influence on the system’s dynamics. There is a need to account for other dimensions of systemic importance such as interconnection, complexity, substitutability. Furthermore, the “systemic” character strongly depends on circumstances, the environment and the specific features of the financial system. Drawing up an a priori list of systemically important institutions would give a false sense of certainty. It may also fuel the moral hazard associated with such firms being perceived by markets as – exactly that – systemic. Various initiatives are currently discussed, including stronger cooperation between supervisors and, more controversially, additional capital charges. They certainly require further thorough analysis It is essential to avoid threshold effects and never forget that risks are continuous in nature, time-varying and state-contingent. The debate about systemic firms echoes also concerns about the activities and business models of some institutions. It is especially so in countries where public intervention to rescue the financial system was on a massive scale. The presumption is that smaller and leaner financial institutions would pose less risk to financial and macroeconomic stability than larger and more diversified ones. Yet, facts suggest this cannot hold as a general lesson from the crisis. Indeed, those banks which suffered most from the crisis were precisely those which were more specialized, such as the investment banks. By contrast, large universal banks, reliant on a large deposit base, could withstand the shocks comparatively better.