minimum capital levels could, by maintaining a material equity value for the bank, serve as a disincentive for excessive risk - taking by management and shareholders. in the ensuing quarter century, banking regulators around the world focused considerable attention toward elaborating capital requirements to reflect more precisely the particular risks faced by a financial institution. capital requirements had, to a considerable extent, become the dominant prudential regulatory tool. the financial crisis showed that this concentrated, almost all - consuming regulatory focus on refining bank capital requirements in basel ii had come at the expense of attention to other risks in the financial system. in particular, banking regulators failed to appreciate fully the implications of the growth – in size, leverage, and maturity transformation levels – of the shadow banking system for the balance sheets of commercial banks and for overall financial stability. the crisis showed that liquidity problems can be an independent source of severe stress, perhaps even for firms that might otherwise have remained solvent. bis central bankers ’ speeches but it was also evident that the specifics of pre - crisis capital regulation fell far short of what this prudential instrument can achieve. the basel i and basel ii capital requirements relied almost exclusively on capital ratios that were essentially snapshots of balance sheets and thus all too often a lagging indicator of a bank ’ s condition. declines in asset values – particularly of non - traded assets – were often not reflected in capital calculations for some time. though already well - known before the crisis, this phenomenon was particularly problematic as asset values declined rapidly, causing both markets and supervisors alike to regard regulatory capital ratios as providing only limited information about a firm ’ s current financial condition. in addition, minimum capital levels had simply been set too low, in general and with respect to particular assets. one of the most obvious examples was the capital requirement for asset - backed securities in the trading books of banks. the requirement was based on returns over a 10 - day holding period, used a one - year observation period that had been characterized by unusually low price volatility, and did not adequately account for the credit risks inherent in these traded instruments. furthermore, at least some of the instruments that qualified as “ tier 1 capital ” for regulatory purposes were not reliable buffers against losses, at least not on a going concern basis. it is instructive that during the height of the crisis, counterparties and other market actors looked almost exclusively to the amount of tangible common equity held by financial institutions in evaluating the creditworthiness and overall

even more meaningful if it were coupled with the adoption of a set of provisions for dealing with unanticipated budgetary outcomes over time. as you are well aware, budget outcomes in the past have deviated from projections - in some cases, significantly - and they will continue to do so. accordingly, a well - designed set of mechanisms that facilitate midcourse corrections would ease the task of bringing the budget back into line when it goes off track. in particular, you might want to require that existing programs be assessed regularly to verify that they continue to meet their stated purposes and cost projections. measures that automatically take effect when costs for a particular spending program or tax provision exceed a specified threshold may prove useful as well. the original design of the budget enforcement act could also be enhanced by addressing how the strictures might evolve if and when reasonable fiscal balance came into view. i do not mean to suggest that the nation's budget problems will be solved simply by adopting a new set of rules. the fundamental fiscal issue is the need to make difficult choices among budget priorities, and this need is becoming ever more pressing in light of the unprecedented number of individuals approaching retirement age. for example, future congresses and presidents will, over time, have to weigh the benefits of continued access, on current terms, to advances in medical technology against other spending priorities as well as against tax initiatives that foster increases in economic growth and the revenue base. because the baby boomers have not yet started to retire in force, we have been in a demographic lull. but this state of relative stability will soon end. in 2008 - just three years from now - the leading edge of the baby - boom generation will reach 62, the earliest age at which social security retirement benefits can be drawn and the age at which about half of those eligible to claim benefits have been doing so in recent years. just three years after that, in 2011, the oldest baby boomers will reach 65 and will thus be eligible for medicare. currently, 3 - 1 / 4 workers contribute to the social security system for each beneficiary. under the intermediate assumptions of the program's trustees, the number of beneficiaries will have roughly doubled by 2030, and the ratio of covered workers to beneficiaries will be down to about 2. the pressures on the budget from this dramatic demographic change will be exacerbated by those stemming from the anticipated steep upward trend in spending per medicare beneficiary. the combination