real economy. 1. strengthening the resilience of financial institutions let me first start with basel iii, which constitutes the cornerstone of regulatory reform for the banking sector. while basel ii was very much focused on a single ratio ( capital to riskweighted assets ), basel iii takes a more comprehensive approach, addressing deficiencies of basel ii and further strengthening the armoury of prudential requirements. let me highlight the main elements of the new basel iii framework : basel iii provides for higher minimum capital requirements, a stricter definition of eligible capital and more transparency. the crisis highlighted the urgency of establishing a common definition of capital. the fact that the definition of what constituted tier 1 capital was neither bis central bankers ’ speeches transparent nor harmonized across countries, contributed to a generalised loss of confidence in the quality of regulatory capital. in addition, it proved necessary to increase the overall level and loss - absorbing capacity of the capital held by banks. moreover, basel iii introduces also entirely new concepts, such as non - risk - based leverage ratios and mandatory liquidity requirements. the leverage ratio will offer a transparent measure to the market that will complement the risk - based capital calculations and introduce additional safeguards against model risk and measurement error. the new liquidity buffers will ensure, in the short term, that banks hold sufficient high quality liquid assets to withstand an acute stress. in the longer term, the buffers will increase banks ’ incentives to use more stable sources of funding on a structural basis. lastly, beyond the micro - prudential dimension of regulation – typically represented by institution - specific solvency requirements – basel iii also introduces macro - prudential elements, most prominently the capital buffer regime. this constitutes an important safeguard to protect the banking sector from periods of excessive aggregate credit growth. let me say that, while generally supporting the underlying objectives of the regulatory reform, the industry has been critical towards the new capital requirements. the industry is of the view that basel iii will increase costs for banks, reduce profitability, lead to credit supply restrictions and, ultimately, hurt the economy. 1 theory and historic experience however demonstrate that those claims are partly based on misconceptions that are important to dispel. although i will not elaborate in detail, let me highlight the following : in the long run, benefits brought by the enhanced capital and liquidity regulation can be substantial. they include a reduction in the frequency of crises and hence on the expected output losses associated with systemic events. the new framework should

e the economy. although some countries have made significant progress, threats of second - wave of infections and concerns about the re - imposition of restrictive movements, have heightened uncertainty. a recent study2 that investigated the long - term impact of a sample of 12 major epidemics in europe concluded that pandemics are followed by years of low natural interest rates3, as the accommodative policy stance persists for a longer period due to household behaviour which raises precautionary savings and depresses investment opportunities. on this basis, it is expected that the global, and indeed, the domestic outlook will be challenging with a longer recovery process. 37. domestically, the bank of ghana, in collaboration with the fiscal authorities, responded decisively to ensure easing credit conditions and liquidity within the financial sector to stimulate economic activity. bank of ghana ’ s action to trigger emergency financing support for 2 jordi et al. 3 the relative demand and supply of loanable funds by savers and borrowers determine the natural rate in the long - run. 34 | p a g e the government was largely enabled by the policy space and gains achieved over three years of strong monetary policy reforms. prior to this action, the bank had observed a strict zero financing of the budget in line with a memorandum of understanding between it and the ministry of finance as part of the imf programme. this policy therefore represented a major policy shift reflecting the “ whatever it takes ” posture to preserve lives and livelihoods, which helped in closing the budget ’ s widened financing gap arising from increased covid - related spending as revenues dwindled. these measures provided some fiscal space for government to help sustain the income of households, businesses and consequently supported a quicker turnaround in economic activity. 38. the relatively strong macroeconomic outturn in 2020 in the midst of the pandemic showing strong foreign reserves buffers, low inflation, relatively stable exchange rates can be attributed to the prudent policy measures implemented over the last three years including the recapitalisation of banks. indeed, the data shows that 35 | p a g e since 2018, non - resident holdings of domestic debt have declined from 32 % to around 18 % in 2020 even as government financing needs remained high. this has been possible due to the recapitalisation of the banking sector which has given banks enough resources to allow them to substitute for the exit of non - resident investors in the government bond instruments. the recapitalisation policy therefore accounts partly