Regulators must be prepared to take early and decisive corrective actions to forestall a build-up of risks in individual banks and the banking system as a whole. BIS central bankers’ speeches  1  Further, contagion amongst banks is a fact of life. Financial systems can be severely stressed by their weakest points, even if it involves a single bank or a group of small banks. The Northern Rock episode in the UK was an example in the earlier phase of this crisis. The Spanish cajas or regional savings banks are now another. The largest Spanish banks are widely acknowledged to be well capitalised, to have lower exposure to the property sector and to have well diversified earnings internationally. But until the troubles in the cajas are resolved, even sound Spanish banks are being penalised by higher funding costs, and citizens and tax payers too are exposed. Confidence is therefore about banking systems, not just about individual banks. This is all the more why regulators have to be vigilant in spotting weaknesses and requiring corrective actions, both across a system and in individual banks. The weakest point matters. International regulatory reforms The global financial crisis has prompted a major review of international regulatory standards. We have achieved much, with the new rules developed through the Basel Committee on Banking Supervision and the Financial Stability Board – new rules on the quantity and quality of capital and liquidity and the ongoing work to strengthen cross-border supervision and resolution frameworks for global banks.

The offensive component of a comprehensive Swiss strategy must be an unequivocal commitment from politicians, regulators and financial sector representatives to competition and free markets. Such a commitment will foster innovation which will ensure the long-term viability of Switzerland as a leading global financial center. A commitment to competition includes a firm commitment to an effective regulatory system based on transparency, proportionality, predictability and an uncompromising fight against abuse. Such a regulatory framework does not stand in opposition to a commitment to free markets. To the contrary, it strengthens free markets by upholding the integrity of markets. Regulatory authorities must not loose sight of the primary aim of regulation: to uphold the integrity of markets and not to impede the functioning of markets. Let me conclude my brief formal comments with a specific example of how innovation in the face of global competitive pressures can foster the viability of the Swiss financial center. In recent years, hedge funds have become an important segment of the global asset management industry. Recent figures indicate that total assets invested in hedge funds are approaching the USD 1’000 billion mark. In comparison, the total size of the open-end mutual funds industry in the United States is USD 7’500 billion. According to industry figures, the annual growth rate of the hedge fund industry appears to have accelerated to a level in excess of 15% in recent years. These figures suggest that investors increasingly look for largely unconstrained investment activities with a focus on absolute return.