jose manuel gonzalez - paramo : the management of the banking sector and the economy – what have we learned about financial markets and regulations? speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the xxvii reunion circulo de economia, sitges, 3 june 2011. * * * ladies and gentleman, it is a pleasure to have the opportunity to speak at this prestigious forum today. the first round of the meetings of “ circulo de economia ” took place exactly 50 years ago ( in 1961 ), constituting a very unique event in spain at that time. since then, these meetings have provided an excellent forum to exchange views and ideas on issues of european and global relevance. today we meet at a time of multiple challenges for our world, so i am sure that inspiring discussions will take place. for more than three years we have been focused on the challenges that the financial crisis has posed to our economies and our societies. still, recent developments in european sovereign debt markets as well as ongoing economic difficulties in some euro area countries remind us that the crisis is not over yet. while the ecb continues to confront, in a decisive manner, the tensions in financial markets, it is also involved in the reform of the global financial system that is currently in progress. i would like to lay out today what i believe are the core areas of the regulatory reform, detailing what has been achieved and what remains to be done. introduction let me start by saying that under the leadership of the g20, a remarkable amount of work has been done by the financial stability board ( fsb ) and the basel committee regarding financial reform. in europe, the european commission has also adopted several new pieces of legislation and many more are underway in order to strengthen the regulatory and supervisory framework. i believe that we can identify the following key areas of the financial reform : first, strengthening the resilience of financial institutions. this includes the introduction of the basel iii framework for banks, eliminating the too - big - to fail problem as well as ensuring adequate oversight of the shadow banking system. second, increasing transparency and mitigating the pro - cyclicality in financial markets and finally, third, introducing macroprudential supervision, which can be considered as the missing link in the pre - crisis era. the crisis has shown the need for a systemic perspective of the financial system that takes into account the interactions within the system as well as with the

restore proper incentives with respect to their risk - taking. let me also highlight that a key element of the sifi policy framework is to develop strengthened resolution frameworks to ensure that all financial institutions can be resolved safely and quickly, without destabilising the financial system and exposing the taxpayer to the risk of loss. the fsb is focusing on the identification of the key elements of effective resolution regimes, which will identify the essential features that national resolution regimes for financial institutions, including non - bank financial institutions, should have. let me mention that the eu is actively participating in the ongoing work and is also taking these global initiatives into account in the design of the european framework. third, another important area where work needs to progress relates to the so - called “ shadow banking system ”. the financial crisis evidenced that systemically important pockets developed in the financial system without any regulatory oversight. a better understanding of the interconnections between regulated and unregulated entities is needed. moreover, it is important to bear in mind that the introduction of more stringent capital requirements for credit institutions may provide further incentives to shift activities outside the regulatory perimeter. for this reason, the regulatory reform should not only focus on regulated banks. it should instead be based on a comprehensive system that extends in a proportional way to all actors, intermediaries, markets and activities that embed potential systemic risk. 2 in this area the identification of data gaps and putting in place an effective monitoring framework as well as reinforce the accounting rules on consolidation internationally are key. 2. increasing transparency and mitigating the pro - cyclicality in financial markets i would now like to touch upon the measures taken with regard to the regulation of financial markets. here, reform must ensure greater transparency for the various market segments and products, sufficient competition in all markets, and attenuate as much as possible the pro - cyclicality that derives from information asymmetries, structural features such as ratings, market phenomena such as herding and short selling practices. in this speech i will focus in particular on improvements in the regulation of otc markets. private financial markets cannot function properly unless there is enough information and reporting both to market participants and to relevant regulators and supervisors. the financial crisis evidenced the increasing opaqueness of the financial sector and the resulting counterparty risk externality. regulatory initiatives that are underway to remedy these issues are therefore of utmost importance. let me begin by highlighting the importance of establishing an appropriate regulatory framework for otc derivatives. otc derivatives