The other polar view is that a more stringent regulation will not have any negative impact on growth because it would essentially reduce the frequency of crisis, hence improving the long term performance of the economy. Both views are well-informed and of interest. They come from fairly different constituencies and have very different underpinnings. Having studied carefully all the arguments made during the last months, let me give you my personal sense, at this stage, on the good regulatory equilibrium. First, some consequences of the new regulations are difficult to predict and should be carefully observed. Quantifying precisely the effect of the reforms on the economy is not an easy task. The phasing-in period of Basel 3 has been specifically designed to be consistent with the economic recovery and, more generally, to minimize potential adverse consequences on banks and the macro-economy. Second, we all know also that any regulation may have unintended consequences. One of those, of course, is to create incentives for regulatory arbitrage. It is therefore crucial that the reforms be applied fully and consistently across jurisdictions. It is also important to make sure that a significant part of financial intermediation does not shift to the unregulated (shadow) financing sector, as this would not help reduce the likelihood of disruptive financial crises. Finally, increasing robustness is a necessary but not sufficient condition to get safer financial systems. Another important element is to ensure that risk remains at acceptable levels and carefully managed.

According to rating agency assessments, the big banks’ intrinsic financial soundness improved significantly last year. However, two aspects should be borne in mind when assessing the big banks’ situation: First, their exposure to credit and market risk relative to their capital remains considerable. Although credit quality abroad has improved slightly, it still remains at historically low levels, particularly in the US and Europe. In view of this, lower-than-expected economic growth or a deepening of the debt crisis in Europe could potentially lead to a further deterioration in the creditworthiness of individual countries. Yet, the big banks’ exposures to sovereign debt in  BIS central bankers’ speeches  1  peripheral euro area countries are only moderate. Should the debt problems in the already vulnerable international banking system or in other sovereigns become amplified, however, these banks could face considerable losses. Second, the big banks’ economic capital situation is less comfortable than their very high regulatory capital ratios under Basel II might suggest. A considerable portion of both institutions’ regulatory capital is made up of capital components that proved to be not fully loss-absorbing during the recent crisis. These include, for instance, deferred tax assets, which are only realised if a bank is profitable, or certain hybrid Tier 1 capital instruments, which only become loss-absorbing in the event of bankruptcy. Thus, such capital components will no longer be recognised under Basel III and will be phased out by 2019. The transition period granted to banks gives them sufficient time to meet the new requirements.