absorbing. however, in the current environment, the resilience of these banks, as measured by the regulatory capital indicators, is overestimated. first, certain risks are not captured by the regulatory requirements. this applies, in particular, to interest rate risk in the banking book, which covers traditional deposit and lending activities. in the current situation, with historically high interest rate risk exposures, this is a significant shortcoming. second, the current capital requirements have a procyclical effect. thus rising real estate prices, by causing loan - to - value ratios to fall, can lead to lower capital requirements. given the growing imbalances on the real estate market, banks ’ resilience, as measured by the regulatory capital indicators, is overestimated. third, the low level of diversification of most domestically focused commercial banks is not taken into account in capital requirements. the main focus of these banks ’ business activities, and their risk exposures, relate to mortgage lending. this concentration of activities is compounded by a geographical concentration at the cantonal or regional level. in the light of these factors, the snb considers that action is needed on two fronts : first, the capacity of some banks to bear the risks incurred must be reviewed, and strengthened if necessary. this applies particularly to banks which have cumulative risks, such as high interest rate risk and high exposure to the mortgage and real estate markets. finma ’ s microprudential measures will play a key role in this regard. second, as the snb has repeatedly emphasised, given the cyclical risks in the swiss mortgage and real estate markets, a temporary adjustment of banking system - wide capital requirements may have to be considered. to this end, on 1 june the swiss federal council announced that a macroprudential instrument will be made available to the swiss authorities from 1 july, in the form of a countercyclical capital buffer. introduction of a macroprudential instrument to conclude, i would like to briefly describe how the countercyclical capital buffer will work. this instrument will enable the authorities to adjust capital requirements in the banking system, depending on potential excesses in the swiss credit market. it is a preventive instrument that can be activated if necessary, to a level deemed appropriate. it can also be targeted to a specific segment of the credit market. once the imbalances have been corrected, the countercyclical capital buffer will be deactivated, either immediately or gradually

paper will explore these issues in more detail. market liquidity before i talk about liquidity i need first to make some distinctions. liquidity is a very broad term and people mean very different things by it. there are three concepts of liquidity. monetary liquidity ; funding liquidity ; and market or asset liquidity. monetary liquidity captures the looseness of monetary conditions – it is underpinned by the stance of the monetary policy authority. funding liquidity is the ease with which banks and other non bank financial intermediaries can raise funding. and market liquidity refers to the ease with which one asset can be traded for another. all three concepts are tightly related. i am going to focus largely on market liquidity today. market liquidity is in itself a very good thing. it allows investors to transact at a reasonable size at or close to prices prevailing in the market prior to the trade. it contributes to markets that are “ effective ” – by which i mean both fair and resilient. liquid markets play an important role in the financing of investment in the real economy. bonds account for virtually all credit growth since the crisis in the us, uk and euro area. so if market liquidity is a very good thing, can you ever have too much of a good thing? surely any reduction in market liquidity is unwelcome. this question is very pertinent today as it is clear that market liquidity in the system is more fragile, not just in particular market sectors, but also across the system as a whole. dealers are holding less inventory. for example, in us fixed income corporate securities, market maker inventories are half the size they were immediately before the crisis and back at levels seen in the early 2000s even though corporate bond markets have doubled in size since then. how much should we worry about that? if liquidity is always a good thing, how far can we and should we seek to restore liquidity to levels seen before the crisis? this is a question that is increasingly asked of prudential regulators. i think the issue is more complex, however. nothing in life is free and that is most certainly true in financial markets. liquidity comes at a price. and that price is not at all the same for all financial assets. it should reflect the underlying liquidity characteristics of the asset itself and how it is traded. financial assets cannot escape entirely their underlying risk characteristics. financial intermediation and financial engineering can reduce the costs of