For this, a necessary, but not sufficient condition is that standards are comprehensive in coverage and consistent across jurisdictions. I am not sure, for instance, that the leverage ratio, if it was to be implemented as a compulsory instrument, would meet this double test. At the current level of accounting divergences, consistency will be very difficult to achieve. Furthermore, there is a risk that it would encourage migration of credit activities towards other – less regulated – parts of the financial system. It is therefore important that consistency apply across standards and countries. Convergence between accounting standards is a precondition for a consistent implementation of some of the prudential reforms discussed by the Basel Committee. It is also essential that new prudential standards for banks become truly universal. Procyclicality Strictly speaking, procyclicality is a tendency of financial systems to fluctuate around a trend with the economic cycle. By extension, procyclicality can encompass all “amplification mechanisms” through which an initial shock results in wider movements in asset prices, credit flows, market liquidity, and, possibly, the real economy. Our accounting and prudential regimes have increased procyclicality in recent years. In a mark to market environment, asset prices movements quickly translate into changes in the capital base of financial institutions. This, in turn, triggers additional demand for assets and a further increase in their prices. This kind of “inverted demand curve”; where demand increases with prices, may create the conditions for deep and lasting financial instability. Addressing procyclicality caused by the regulation itself is therefore a priority.

It is hard to see how this fixed buffer, supposed to be on top of the minimum requirement, would not be perceived as a new regulatory minimum. Also, it is very hard to see how this mechanism may not have adverse impact on banks’ share ownership. Another avenue to address procyclicality through prudential rules is by putting in place a countercyclical capital buffer. The logic is simple and, in principle, appealing: the mechanism, indexed on a macroeconomic variable, would force banks to build capital reserves when they can do so and allow them to consume such reserves in a downturn. This would be expected to ensure that banks accumulate and use self-insurance in synchronization with the financial cycle. In practice, we still need to clarify the conditions and the set up for triggering the release of surplus capital accumulated through the mechanism. Such a mechanism may not necessarily be cumulative with others and we may have to choose. Systemic risk and moral hazard As techniques for managing and allocating risk became more sophisticated, the network of counterparties expanded in scale and in complexity. This was, truly, a systemic change that was properly understood but not fully captured by regulators at the time. Credit and market risk was supposedly more broadly spread. But counterparty risk increased. Overall, the overall impact on financial stability may well have been negative. There might be a temptation to assess systemic risk through a crude “size” criterion. “Too big to fail” certainly warrants special treatment.