Before discussing these topics, let me first set the stage and recall why the current focus on enhancing banking regulation is right. From an economic viewpoint, banks perform two broad functions. They first perform maturity and liquidity transformation. Maturity and liquidity transformation is due to the nature of their assets and liabilities: traditional bank assets are rather illiquid and longer term, whereas their liabilities are more liquid and shorter term. Banks also perform a credit risk screening function, as they should be well-equipped to assess such risks. As such, banks are central to the financing of economic activity. Economic development requires sound banking systems. Indeed, productive investment and, to some extent, consumption, which constitute the fuel for growth, require financing in order to be carried out. This financing may be obtained through two channels: capital markets or banks. These two channels are complementary. But the role of banks is clearly central. This is especially true in continental Europe, where they are responsible for more than 80% of financial intermediation. Although US firms rely much more on financial markets, banks play a key role here too. Admittedly, large companies, which are regularly monitored by rating agencies, may “avoid” borrowing through banks, but we know the limitations of extending this aspect of the securitization process, which enables direct market financing, to the financing of small and medium-sized enterprises or households. Typically, two constraints weight on the supply of credit by banks. The first is a constraint on banks’ capital.

While the crisis has clearly had global ramifications, its impact on financial systems has not been uniform across the world. Financial structures differ greatly between countries and there needs to be scope for different countries to tailor solutions to their circumstances and structures, while, at the same time, doing so within a globally agreed framework. For instance, our experience in France is that our banks’ universal model has weathered the storm relatively well. It would be a major paradox to put in place rules that would challenge such models. Finally, any regulatory framework needs to manage regulatory arbitrage and keep up with innovation and other forms of structural changes. For this, a necessary but not sufficient condition is that standards be comprehensive in coverage and consistent across jurisdictions. I am not sure, for instance, that the leverage ratio, if it were to be implemented as a compulsory instrument, would meet this double test. Given existing accounting divergences, consistency will be very difficult to achieve. Furthermore, it is likely to encourage migration of credit activities towards other – less regulated – parts of the financial system. Convergence between accounting standards is a precondition for a consistent implementation of some of the prudential reforms discussed by the Basel Committee. It is also essential that new prudential standards for banks become truly universal. We should not underestimate the difficulties on the road to accounting and regulatory convergence. 2  BIS Review 57/2010  How can we reduce the procyclicality of financial systems?