Various proposals have been formulated in this regard, including: strengthening the capital requirements for counterparty credit risk exposures arising from derivatives, repos and securities financing activities; a leverage requirement (capital divided by total exposure) to put a cap on the level of leverage in the banking sector; and internationally harmonised global liquidity standards, including a liquidity coverage ratio and a structural ratio (measuring the amount of longer-term stable funding sources to cover the liquidity needs for funding assets over the period of one year). Finally, governance of financial institutions must be strengthened, for instance with regard to remuneration incentives. 13 The regulatory community is well aware of the fact that the reform must be introduced in an ordered manner in order to ensure the resilience of the financial system as a whole, while also supporting economic growth over the longer term. The proposals are currently the subject of extensive consultations with the banking system. In addition, an impact study will be conducted to assess the implications of the various measures. Based on the outcome thereof, the aim is to arrive, by the end of 2010, at an appropriate calibration for the new requirements in terms of the level and quality of capital, in order to find a balance between financial innovation, financial stability and sustainable economic growth. The Basel reform will be phased in gradually as financial conditions improve and the economic recovery strengthens, with the aim of implementation by the end of 2012.

The steps taken by central banks have taken them into, up to now, uncharted territory. Interest rates have been reduced to very low levels by historical standards, clearing the way for significantly lower bank interest rates (although with a significant time-lag), thus supporting credit demand from households and firms. At the same time, non-conventional measures have been adopted with the aim of bringing abnormally high money market spreads down and ensuring a proper transmission of the monetary policy impulse. These exceptional measures have had important effects on macroeconomic and financial stability, and improved the overall conditions on financial markets. 19 In particular, they have helped to “liquefy” assets that could otherwise have caused the insolvency of many financial institutions. More generally, they have helped to restore confidence by reducing uncertainty. In addition, they have prevented contagion effects that can arise in the financial system as a result of the inter-connectedness between various market participants. The monetary policy intervention also helped to restore the profitability of banks as the fall in short-term interest rates steepened the yield curve, to the benefit of the banking system, which usually funds itself in the short term in order to provide credit for longer terms. This profitability also helped to support the flow of credit to the economy. Financial measures have also been adopted, such as increased deposit insurance, guarantees for bank liabilities, and injections of capital. In addition, fiscal budgets have supported aggregate demand via automatic stabilisers and expansionary measures.