. recapitalization : another “ sword ” for cutting the knot? the loops that exist between the sovereign risks and the risks in the banking system in the current crisis make it necessary to address banking risks specifically. capital buffers might offer an appropriate solution. the rationale for recapitalization was outlined in the bundesbank ’ s most recent financial stability review. i quote : “ [ … ], in times of systemic stress, markets cease to make broad based distinctions because [ … ] it is almost impossible ex ante to forecast the position of an individual bank. [ … ] given the high degree of interconnectedness and the risk of contagion, this challenge demands not just an adequate capitalization of national banking systems but also convincing solutions that are coordinated across europe. ” in principle, adequate capital buffers strengthen the resilience of the financial sector, because they interrupt the sequential failure of institutions and mitigate contagion risks. they can reduce the procyclicality present in the system as they create room for manoeuvre before risky assets and credit supply have to be reduced in case a systemic event occurs. in an ideal world these buffers are set up during a boom period ; they are to be used when a crisis emerged, which is the idea behind countercyclical capital buffers. however, if the buffers are low relative to the risks that are building up when the event has already occurred there is the risk of excess deleveraging and procyclicality. this is where public aid comes into play. this may assist the recapitalization of the banking system thereby counterbalancing excessive deleveraging pressure. as you know, this is the strategy followed by the european and national authorities, combined with some moral persuasion to abstain from excess deleveraging. and it looks like this strategy is going to be successful. at least this is what the capitalization plans of banks indicate. most of them intend to adjust their liability side to a large extent, not their asset side. of course, in some countries there is nevertheless some deleveraging pressure ; but this is, or was, due to the refinancing needs of their banks and is not caused by the recapitalization plan itself. on the contrary, if a loss in confidence is a major reason for the refinancing problems, restoring confidence through publicly assisted recapitalization might be a key tool to mitigate excess delever

well as the regular discussions at the “ efc stability table ”. however, supervisors and central banks in the eu have also taken precautions for the event of a crisis. in 2003, for instance, the bsc reached an agreement on cross - border cooperation and on the exchange of information between supervisory authorities and central banks. in 2005, the finance ministries joined this agreement. to avoid any misunderstanding : we are not talking here about guaranteed financial assistance for individual institutions. all the institutions involved agree that responsibility for solving problems rests first and foremost with the market players themselves. nevertheless, a framework for the better handling of systemic risks has been put in place. iii despite all this progress, there are still many items left on the agenda. let me pick out three of them. europe ’ s supervisory structures are under non - stop scrutiny. just recently, the “ inter - institutional monitoring group ” presented its 2007 interim report on the lamfalussy procedure. the report calls for greater efforts in making progress with level 3 supervisory cooperation – which, for banking supervision, means within cebs. i rate this, first of all, as an endorsement of the cooperative model of supervision in europe. that further efforts are needed is beyond dispute, and this is something of which all the responsible national supervisors are aware. what is important, however, is that these structures – which were created only a few years ago – are given the necessary time to achieve the consistent progress. even so, there are occasionally calls from some banks to move european supervisory structures in the direction of a “ lead supervisor ” or even a centralised european supervisory authority to supervise large institutions active throughout europe. most european banking supervisors 1, including the bundesbank, have tended to be critical of this idea in their initial analyses. in its white paper, the callum mccarthy ( fsa ) says this about the idea of a “ lead supervisor ” : “ instead of this approach, we should recognise that regulation of pan - european groups requires collaboration among regulators. we must be more efficient in how we go with this. but pretending we can achieve better european regulation by simply ‘ allocating ’ the task to one regulator is not the answer. ” commission, too, has advocated stepping up cooperation within the established structures and pressing ahead with the convergence of supervisory rules. still, please allow me to make some remarks on the concept of a “ lead supervisor ”. in this supervisory model, the home - country supervisor responsible for the parent of a financial group would take on the function