you look at it. and then as a further measure we required an additional buffer of capital for projected losses beyond the stress test period, to a value of €5. 3bn. should ireland or other eu member states adopt the schwarzenegger school and fast forward all the way to basel 3 as soon as possible? as i say, that has strong attractions for a micro - prudential supervisor. but there are two absolutely necessary conditions for this to make sense. first, it would have to be absolutely clear that the tougher capital requirement cannot be met by deleveraging, as that would defeat the purpose and exacerbate the macro - prudential problem. 6 second, we have the sovereign debt negative feedback loop to worry about. accelerated basel implementation shouldn ’ t come at the cost of worse debt philip hildebrand and lee sachs financial times oped 24 september2012. the eba ’ s recapitalisation exercise did a good job of managing this by the way. http : / / www. eba. europa. eu / capitalexercise2012 / finalreportrecapitalisationexercise. pdf. bis central bankers ’ speeches sustainability. so, this approach also only makes sense if there is european direct capital support to make this happen. in the absence of these essential conditions, we then have the third approach, the dell school. this is, of course, named after michael dell, one of the innovators of just - in - time manufacturing. this involves making sure that banks stay above their current minimum capital requirements, 7 and living with that just up until the point of need of recapitalisation and public support, to meet basel 3 or stress losses. call this a just - in - time approach to backstops, if you like. banks therefore make their slow progress towards full basel 3 compliance step - by - step. this may involve a protracted period of uncertainty, but you are not adding fuel to the sovereign debt crisis fire by trying to accelerate the implementation process through more sovereign borrowing. which school of thought would i adopt to resolve the micro - macro dilemma? 8 in a nod to the st augustine school, it certainly makes sense to take off the table any thought about attempting to impose an additional counter - cyclical buffer for the foreseeable future. with the end point of crdiv clear, supervisors should require european banks to set out their capital plans for achieving their trajectory to full compliance with cr

the negative feedback loop between the banking sector, sovereign debt and the real economy. there are two dimensions to this feedback loop problem : procyclicality – or the interaction between bank lending and the real economy – and backstop burdens – or the interaction between bank recapitalisation and sovereign debt sustainability. procyclicality is the phenomenon by which banking capital rules exacerbate the business cycle by encouraging lending at a time of growth or contracting it in a time of recession. basel 3 aims to build up a countercyclical buffer to lean against the wind in good times and be eased to help growth in bad times. we are evidently in bad times now, so intriguingly this has prompted some to consider whether you should in fact be starting to release the buffer. indeed, you could probably run the basel countercyclical buffer methodology with some plausible assumptions and get to the conclusion that for many countries we are well past the point where the buffer would be released. the problem, of course, is that the buffer is not in place to be eased and, indeed, that there is still a further strengthening of capital required under basel 3. in addition, market expectations are for more capital faster. where they can, banks are responding by racing to meet the new basel standard well ahead of the five year bis central bankers ’ speeches transitional period. in this respect, what the regulator has given – a transitional period to ease the impact of the new rules – the market has taken away. a fair minded regulator should acknowledge that was a concern identified by industry some time ago. all these considerations led the eba to be very careful in design of the buffer in two respects. we made it clear that in calculating the capital buffer the determination of sovereign debt exposure would be fixed at one point in time, so there was no advantage and therefore incentive to dispose of sovereign debt holdings. and we provided tight guidelines limiting the capacity of banks to meet the capital requirement through deleveraging activity – reducing lending – that would hurt the real economy. we have now seen the banks ’ plans to meet the eba ’ s aggregate €115 billion requirement. the assessment is encouraging, with banks ’ providing a margin for error, with very limited deleveraging planned and with overwhelmingly most of the required minimum met by new capital rather than reduced assets. however, eba will of course monitor developments very closely. where should we go next in terms of policy responses? the european banking regulators ’ room for