It is easy to forget how close the world came to a full-blown depression as a result of the financial crisis in 2008. The global financial crisis was remorseless in the wake of destruction that it unleashed upon the economy and society. The cumulative loss of output since the crisis is estimated to be 25% of one year’s world gross domestic product 1. For the US alone, estimates of the output loss from the crisis vary from $ trillion to $ trillion2. The crisis revealed deep fault lines in the financial system: financial institutions that leveraged themselves to the hilt (as much as 40 dollars of debt to 1 dollar of equity) and had severe mismatches in liquidity; lax underwriting standards, made worse by conflicts of interest in banks originating mortgages; an opaque OTC derivatives market, leading to rapid contagion when liquidity suddenly dried up. The Financial Stability Board (FSB), working closely with standard-setting bodies, put in place 1/9  BIS central bankers' speeches  over the last eight years a comprehensive set of regulatory reforms to address these fault-lines. The aim is to make the financial system less prone to crisis and more resilient in the event of crisis. There are three key thrusts. First, strengthening the banks. This is being done through the Basel III reforms, increasing capital buffers, setting liquidity requirements, and constraining leverage. Second, making derivatives markets safer. This is being done through requirements for trade reporting, central clearing, and margining. Third, tackling the too-big-to-fail problem.

Small banks are trimming product lines and pulling back from certain customer segments. Emerging market and developing economies (EMDEs) have expressed concerns that global banks have been reducing their activities in these markets as they review their business models in light of the new regulatory environment. The FSB is keeping a close watch on this. We have rightly focused our regulatory efforts to minimise the risk of another financial crisis. But we must continually ensure that we do so without minimising economic growth and opportunity. Fine-tuning regulation We must be careful to avoid “pendulum swings” in regulation that could undermine the gains in financial stability that we have achieved, not to mention prolong and add to the uncertainties facing the financial industry. That regulations have imposed costs on the economy is in itself not sufficient reason to unwind them. 3/9  BIS central bankers' speeches  These costs have to be weighed against the benefits of a more stable financial system to support sustainable economic growth. De-regulation has its own costs. Having said that, some fine-tuning may be necessary to reduce the unintended effects of reforms while preserving their benefits. Regulatory policy must continually seek the fine line between discouraging excessive risktaking and encouraging innovation. We should not be afraid to adjust and fine-tune where necessary. As Dan Tarullo, former governor of the Federal Reserve Board, says with respect to the Dodd-Frank Act and other regulations in the US, “some recalibrations and reconsiderations will be warranted on the basis of experience."