down under the weight of macroeconomic turbulence, technological and business innovation, and competition. during the succeeding three decades these activities became progressively more integrated, fueling the expansion of what has become known as the shadow banking system, including the explosive growth of securitization and derivative instruments in the first decade of this century. this trend entailed two major changes. first, it diminished the importance of deposits as a source of funding for credit intermediation, in favor of capital market instruments sold to institutional investors. over time, these markets began to serve some of the same maturity transformation functions as the traditional banking systems, which in turn led to both an expansion and alteration of traditional money markets. ultimately, there was a vast increase in the creation of so - called cash equivalent instruments, which were supposedly safe, shortterm, and liquid. second, this trend altered the structure of the industry, both transforming the activities of broker - dealers and fostering the emergence of large financial conglomerates. there was, in fact, a symbiotic relationship between the growth of large financial conglomerates and the shadow banking system. large banks sponsored shadow banking bis central bankers ’ speeches entities such as structured investment vehicles ( sivs ), money market funds, asset - backed commercial paper conduits, and auction rate securities. these firms also dominated the underwriting of assets purchased by entities within the shadow banking system. though motivated in part by regulatory arbitrage, these developments were driven by more than regulatory evasion. the growth and deepening of capital markets lowered financing costs for many companies and, through innovations such as securitization, helped expand the availability of capital for mortgage lending. similarly, the rise of institutional investors as guardians of household savings made a wide array of investment and savings products available to a much greater portion of the american public. but these changes also helped accelerate the fracturing of the system established in the 1930s. while the increasingly outmoded regulation of earlier decades was eroded, no new regulatory mechanisms were put in place to control new risks. when, in 2007, questions arose about the quality of some of the assets on which the shadow banking system was based – notably, those tied to poorly underwritten subprime mortgages – a classic adverse feedback loop ensued. investors formerly willing to lend against almost any asset on a shortterm, secured basis were suddenly unwilling to lend against a wide range of assets, notably including the structured products that had become central to the shadow banking

new framework. unfortunately, over the last months, some market participants have raised fears that basel iii might hamper economic recovery or would damage national interests. yet this is not the case. the new rules are indispensable for improving banks ’ resilience and will generate substantial benefits by reducing the likelihood of financial crises as well the output losses associated with such crises in the future. i therefore warmly welcome the fact that, in cannes, the g20 leaders took the opportunity to call on jurisdictions to meet their commitments to fully and consistently implement the new basel framework within the agreed timeframe. individual countries should not seek to gain advantages by watering down or reluctantly implementing internationally agreed reforms. conclusion ladies and gentlemen, to sum up : the cornerstones for making the financial system more resilient are now in place. nevertheless, much remains to be done. we must put our commitments into practice and translate the agreed reforms into national laws and regulations. in particular, we need to ensure that all financial institutions can be resolved without destabilising the financial system, to better illuminate the shadow banking system and put in place regulatory measures where necessary and to implement the new basel framework consistently across jurisdictions. thank you for your attention. bis central bankers ’ speeches