The current mandate of the EFSF not only allows it to extend temporary loans to euro area governments in need, but also to buy bonds in both the secondary and primary markets, to act on the basis of a precautionary programme and to finance bank recapitalisations through loans to governments including in non programme countries. The resources committed to the EFSF are substantial. The ESM, which will have a paid-in capital of € billion and callable capital of € billion, has a capital base around three times that of the European Investment Bank. At the 26 October Euro Summit euro area leaders also agreed on two schemes which will allow a significant leveraging of existing EFSF resources in order to increase the fund’s ability to act. But perhaps the most significant development, relative to past expectations, is the implementation of root-and-branch reform programmes in a number of euro area countries. 4  BIS central bankers’ speeches  One should not underestimate the significance of EU-IMF programmes for structural changes in some economies. They are dealing with long-needed pension reforms, opening up closed sectors of the economy, modernising public administration. In terms of collective economic management, this development goes further than many federations. Can we imagine, for example, the U.S. federal government requiring a similar depth of reform in California? Countries outside of EU-IMF programmes have also implemented major reforms. Spain has recently passed a constitutional balanced budget amendment, disproving the view that major policy changes are impossible in an election year.

In line with Basel III, the Commission’s proposal (so-called CRD IV) provides for higher minimum capital requirements, a stricter definition of eligible capital and more transparency. It also introduces also entirely new concepts, such as mandatory liquidity requirements and a non-risk-based leverage ratio. Beyond the micro-prudential dimension of regulation, the proposal introduces macroprudential elements, most prominently the countercyclical capital buffer regime. This constitutes an important safeguard to protect the banking sector from periods of excessive aggregate credit growth. And on top of this, the European Council has recently decided that European banks need to have a 9% core tier one capital ratio by the middle of next year, instead of by 2018, as agreed by the Basel Committee. Other important regulatory initiatives are underway. These include the establishment of an appropriate regulatory framework for over-the-counter derivatives, enhanced oversight of Credit Rating Agencies, the prevention of systemic risk coming from the “shadow banking sector” and an EU crisis management framework for bank recovery and resolution. As regards the supervisory framework, a new system of financial supervision has been established creating, for the first time, European level macro-prudential supervision through the European Systemic Risk Board (ESRB). This discussion raises an obvious question: if so much has been achieved since 2009, why have euro area authorities not been more effective in halting the crisis? In my view this is fundamentally a political question, related to making policy between 17 sovereign democracies.