Thus, the reform agenda will need to pay proper attention to capacity building of banks and regulators. Nevertheless, there are warranted rationales for its use in financial stability tool kit in an appropriate manner, given national context. In terms of measures to address systemic risk, the proposed ideas include systemic capital charge, capital for OTC derivatives, and cross-border bank resolution framework. Again, the same emerging market issue and dimension should be properly recognized. Turning to the key microprudential policy framework currently being discussed at the international forums to ensure individual financial institution’s stability, the BCBS has proposed a package to address previous shortcomings in risk-based supervision as follows. For Pillar I, regulatory capital for securitisation exposure is enhanced. In addition, the quality and transparency of capital is strengthened especially Tier I capital, which would consist mainly of common equity and retained earnings. For Pillar II, supplemental guidelines are issued by requiring banks to manage firm-wide, concentration and reputational risks more effectively. Valuation and stress-testing practices are also improved. Moreover, compensation and bonus scheme should be aligned with longterm risk taking behaviour and performance. Turning to Pillar III, focus is given to disclosure requirements to reduce uncertainties associating with securitization exposures. Additional requirements include, for example,  2  BIS Review 131/2009  sponsorship of off-balance sheet vehicles, and resecuritisation exposures. On top of these, a new regulation on liquidity risk management, namely the so-called liquidity coverage ratio could be introduced, going forward, subjected to further work.

Accordingly, we continue to estimate that the current high level of inflation will be temporary, a vision that is shared by market agents, as inflation expectations one and two years ahead have remained around 3 percent (figure 4). As I said at the beginning, the biggest news in several months comes from domestic demand and output, which posted a quite weaker performance than our forecasts. In the second quarter GDP grew 1.9 percent while domestic demand dropped 0.9 percent annually (figure 5). Expenditure’s poor performance permeated its every component, where worth noting was the fast deterioration of the most persistent ones, such as non-durable consumption and investment in construction and engineering works. By sectors, trade, especially wholesale, fell in annual terms, while a large number of manufacturing branches posted meager results. Only those most linked to the export sector show marginally more favorable figures. The evolution of expenditure has also driven a reduction in imports, causing a sharper adjustment to the current account (figure 6). In fact, while a year ago the annual deficit of the current account amounted to 4 percent of GDP and was expected to increase further, at the end of the second quarter it was at 2.4 percent of GDP and is now expected to end the year at 1.8 percent of GDP. This level, plus the peso depreciation and its effects on exports, mean that we can look at this variable’s future behavior with ease.