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.

The first line of defense against procyclicality should be the accounting framework. I strongly support the current focus on changing the accounting rules. More precisely, moving from an incurred loss model to a forward looking model is essential. We need a robust, auditable and straightforward provisioning system at the accounting level based on a forward looking model that would allow provisioning efforts commensurate with credit risks through time. This framework should also be simple, bearing in mind the ultimate objective of creating synergies between prudential and accounting standards. The Basel Committee is working on a very comprehensive approach, which is casted in its “Principles for revision of IAS 39”. Accounting standard setters have also been working hard. I firmly believe that two steps are required going forward. One is that the IASB should follow the principles by the Basel Committee. Another is that the IASB and the FASB should adopt a common methodology regarding provisioning based on expected credit losses. This is a precondition to ensure that the G20 countries have convergent accounting systems. Some of the procyclicality can also be trimmed through prudential regulation. Efforts to make solvency ratios potentially less procyclical are welcome and should be pursued. In particular  2  BIS Review 35/2010  those efforts aimed at imposing a measure of risks “through the cycle” or “downturn” are useful. Other options to take some of the procyclicality off through prudential standards include a fixed buffer, which would act as a capital conservation device. I see some limitations to such an option.