We also know that banking crises can threaten macroeconomic stability through their potential effects on confidence, savings, financial flows, monetary control and the budgetary impact of bank rescue packages. In sum, achieving an inclusive, efficient, sound and stable financial system is an important and complex task, and it has many dimensions. To me, Basel II represents a tremendous effort of more than six years to analyze and promote some of the main elements of a sound banking system: those related to risk management and capital. My talk will address two main issues. First, I will share some reflections on how I believe Basel II will contribute to the stability of the financial system. Secondly, I will offer some thoughts on steps countries can take in preparation for adopting Basel II. Basel II and financial stability Banking is fundamentally about trust. Banks are charged with a special public trust to safeguard customers’ wealth. We have all seen what happens when customers lose trust in the ability of individual banks or the banking system as a whole to protect their savings. This puts a special onus on banking supervisors to ensure that banks operate soundly. No bank can maintain public trust for long if it lacks sufficient capital, so supervisors impose capital requirements to safeguard the banking system. Since capital is the last line of defence against bank insolvency, regulatory capital requirements are one of the fundamental elements of banking supervision.

The combination of those 3 trends is translating into activities and services that first swept into the payment sector and are now spreading more broadly. Among them, socalled decentralized finance, DEFI, is emerging as a crypto-based alternative to traditional finance, where the provision of services is claimed to be disintermediated and their governance decentralized, and is enabled notably by permissionless blockchains, smart contracts and decentralized apps. Digital innovation therefore acts as centrifugal forces: they aim to create a movement of decentralisation that runs counter to the traditional architecture of the monetary and financial edifice, centralised around trusted institutions –the central bank, credit institutions and market infrastructures-. Second, these decentralisation forces might have a two-sided impact on the functioning of our financial system, both in terms of efficiency and stability. 1/3  BIS - Central bankers' speeches  From an efficiency perspective, they can bring in particular more transparency, costefficiency and availability around the clock. But they bring also a risk of fragmentation of processes, if the blockchains are not interoperable and cannot also smoothly interact with legacy, centralised, clearing, settlement and payment systems. From a stability perspective, it is clear that currently the crypto ecosystem is not large enough and interconnected enough to threaten the stability of the whole financial system, as shown by the modest impact on mainstream finance of last year's turbulences, in the wake of the Terra-Luna and FTX conglomerate collapses. But these collapses did have significant negative spillover effects within the crypto ecosystem.