So I am very pleased that at end-June this year the Group of Governors and Heads of Supervision, which I had the privilege to chair, adopted the consultative document regarding global systemically important banks. The envisaged measures have several objectives. These objectives include reducing the probability of an adverse event occurring, reducing the extent or impact of the failure of a systemically important bank and reducing the cost to the public sector. The framework is built on two building blocks that increase the loss absorbency of global systemically important banks. The first building block is a gradual capital surcharge based on the degree of systemic importance, ranging from 1% to 2.5 % of risk weighted assets. 2  BIS central bankers’ speeches  The second building block is that the additional capital requirements have to be met with common equity. The unambiguous choice of common equity as the unique instrument to meet the capital surcharge should ensure robustness. These measures complemented with supervisory judgement should capture structural and cyclical changes in the banking system. Shadow banking The introduction of more stringent capital requirements for credit institutions under Basel III as well as the requirements for global systemically important banks, may provide incentives for banks to shift part of their activities outside the regulatory perimeter. It is therefore decisive that we continue our work to improve our capacity to identify and assess the potential risks stemming from the shadow banking system. We need to develop a better understanding of the interconnections between regulated and non-regulated entities.

In its last meeting in June, the ESRB underlined the threat to financial stability stemming from the interplay between the vulnerabilities of public finances in certain EU Member States and the banking system, with potential contagion effects across the Union and beyond. To ensure the resilience of the EU financial system and limit the potential for adverse spillovers,  BIS central bankers’ speeches  1  the ESRB at the time also stated that backstop plans should exist, starting with resources from private markets and, if necessary, with public funds. As we also said at the time, we are furthermore working on specific issues such as FX lending, complex financial products and mismatches in the funding structure between various currencies. Let me mention that we have our next ESRB General Board meeting next Wednesday. Basel III implementation As regards Basel III, compared with Basel II, the new framework envisages higher minimum capital requirements, better risk capture, stricter definition of eligible capital elements and more transparency. These elements should substantially improve banks’ capital position and loss absorbing capacity, thus enhancing the resilience of the financial sector. The new Basel framework also introduces entirely new concepts, such as a non-risk-based leverage ratio and mandatory liquidity requirements. It has been agreed that these measures will be introduced gradually during a transition period. It is essential that prior to their introduction the potential impacts of these new elements on financial markets are carefully assessed to ensure that these measures do not hinder banks providing funding to the real economy.