one might argue then that, even if the scr may not be a better tool to prevent failures than the simple and robust solvency margin of solvency i with its accompanying prudent reserving principle and compulsory asset diversification, the scr favours the proper capital management of an insurance undertaking. but we know that the mathematics of normal distributions, on which solvency ii is based, bring a veneer of science that ill fits reality. yes, normal distributions are easy, or easier to handle, than other probability distributions, but they do not reflect what happens in market crises, nor do they accommodate non - proportional reinsurance. the bis central bankers ’ speeches quirks of the scr calculation make this requirement an unlikely, unreliable tool to manage capital. credit rating agencies, large brokers, reinsurers and counterparties are unlikely to rely on the scr, or on the scr alone, to assess the risk they take when dealing with insurance companies, and certainly the supervisor will not be using it for more than it is worth. the complicated inadequacy of capital based regulation would be less severe had solvency ii not dispensed with the cornerstone of solvency i reserving, i. e. the principle of prudence. in its place we find an ideological construct, where technical reserves are supposed to be valued at exit prices, even though these exit prices aren ’ t observable. the worst of solvency ii would be the distortion of investment incentives coming from the zero credit risk charge that solvency ii assigns to sovereign bonds, if pride of place wasn ’ t of course reserved to the solvency ii valuation of long dated life insurance liabilities. there, one achieves a seemingly impossible feat, namely to state that they are to be market consistent, and at the same time to use interest rates that are several hundred basis points over market rates. the end result is a massive prudential understatement of these liabilities and a gross misrepresentation of the solvency position of the firms that sell these contracts. fortunately irish firms are not among the european firms that have to contend with such a failing of regulation, due to the structure of their insurance liabilities. in ireland our challenge will be to use the good that solvency ii offers to bring non - life insurance management and supervision better tools and one hopes better outcomes than the experience of the past decade. the opportunity to share my thoughts with you on solvency ii was too

in may 2010. tensions spilled over into market segments other than government bonds. not surprisingly, the credit risk of the eu banking system mounted to levels higher than those observed after the collapse of lehman brothers ( see chart 4 ). by the same token, the probability of a simultaneous default of two or more large and complex euro area banking groups, as measured by the indicator of systemic risk reported in chart 5, rose sharply on 7 may. money market volatility also surged ( see chart 6 ) : implied volatility on three - month interest rate futures went up in early may for contracts expiring six months ( second contract ) and 12 months ( fourth contract ) ahead. regarding the foreign exchange markets, between mid - february and 7 may, the euro depreciated by 7 % against the dollar, from usd 1. 36 to 1. 27 per euro. shorting the euro became the proxy speculative position for selling greek and other “ peripheral ” debt. in early may the net short speculative ( non - commercial ) position against the euro reached a record 114, 000 contracts, equivalent to about €14 billion ( see chart 7 ). the turmoil had an impact on equity markets as well : between mid - february and 7 may, the euro area stock market declined by more than 7 % ( and by 15. 5 % from april 15 to may 7! ). even more worrisome, in may equity indices decreased worldwide ( see chart 8 ). in may and june the average pair - wise realised correlation between s & p500 stocks went up more than it did after the lehman bankruptcy. loosely speaking, this indicates that concerns about macroeconomic developments had inhibited investors from differentiating between different stocks, and panic was mounting ( see chart 9 ). stock markets also became more volatile, as reflected by the increase in the implied volatility of the eurostoxx50 and s & p500 indices, albeit at levels lower than those observed towards the end of 2008 ( see chart 10 ). the longterm implied volatility of the us stock market also surged ( see chart 11 ). finally, indicators of investors ’ sentiment, as measured by the difference between equity put and call options implied volatilities, went up in may ( see charts 12, 13, and 14 ). all in all, on the eve of the first week - end of may the global financial system was on the verge of a meltdown similar to, if not worse than, the