in the second pillar of the basel framework, supervisors will be reinforcing the importance of banks ’ stress testing practices. as i mentioned, basel ii already requires that banks conduct stress tests of their credit portfolios to validate the adequacy of their capital cushions at all points of the credit cycle. however we need to think more about the importance of banks ’ conducting scenario analyses and stress tests of their contingent credit exposures, both contractual and non - contractual. these contingencies have implications for balance sheet growth and capital. as we have seen, many banks have taken significant exposures back on the balance sheet for reputation reasons. being better prepared for such scenarios going forward can help make banks more resilient to stressful conditions. in pillar 3, there are opportunities to further leverage off the types of disclosure required under basel ii. in particular, supervisors need to monitor the type of information that banks make available for structured credit products. the committee will determine whether improvements are needed, particularly related to securitisations, conduits and the sponsorship of off - balance sheet vehicles. strengthening liquidity risk management and supervision so far i have told you about the basel committee ’ s objectives in developing the basel ii framework and the lessons we have thus far learned from the recent turmoil, which – taken together – will forge a strong capital framework. but a strong capital base is one part of the puzzle – another is strong liquidity risk management and supervision. banks with a weak capital base are vulnerable to liquidity problems during periods of financial market stress. however even banks with strong capital can experience liquidity problems if they do not manage this area well. before the market turmoil began last summer, the committee had already launched a work stream to assess the current state of liquidity risk management and supervision. however, as a result of the turmoil, we have accelerated this work. last month we released our assessment of the weaknesses identified by the crisis and what we think needs to be done about it. we are now well along to completing a fundamental review of the global standards for liquidity risk management and supervision, which were issued by the basel committee in 2000. we plan to issue the new standards for public comment this coming july. some of the key areas we will address include the need to enhance overall governance for liquidity risk management, integrating it more closely with other risk management disciplines. we will address the need to strengthen liquidity stress testing practices, including the capture of offbalance sheet contingent exposures.

economy is very complicated, and in many cases not fully understood. the famous black box monetary economists talk about. finally, the problem of time inconsistency applies to monetary policy as well. monetary authorities may be tempted to create unexpected inflation to stimulate the economy in the short run. eventually, economic agents will revise their expectations and the result will not be a higher growth rate, but a higher rate of inflation instead. hence, playing the monetary piano is perhaps even more difficult than playing the fiscal violin. fiscal policy co - ordination against this background, let ’ s turn to discussing economic policy co - ordination in the context of emu, starting with the co - ordination of fiscal policies. as i have already argued, playing the fiscal violin is very difficult. by definition, it is even more difficult to prevent fifteen eu fiscal violinists to play out of tune. do my critical observations rule out any co - ordination, at any time? no, under certain special circumstances, fiscal policy co - ordination can be welfare - improving. this assertion is based on a conventional game - theoretical model : fiscal policy - makers maximise independently of each other - a welfare function in which the spillovers of their actions to other players are neglected. the joint welfare of the economies involved increases if fiscal policies are subsequently co - ordinated and policy makers take into account the consequences of their actions on the other players of the game. however, given the caveats mentioned, we have to conclude that the scope for active fiscal policy - making is limited. only in very specific circumstances, the ecofin council should consider the possibility of fiscal policy co - ordination. for instance, when there is a risk of overheating or a common recession, or when the euro area is faced with a persistent balance - of - payments deficit. the basis for the co - ordination of fiscal policies is the multilateral surveillance procedure provided for in article 103 of the ec treaty. in my view, it is possible to elaborate the so - called broad guidelines of the economic policies of the member states, which the ecofin council adopts in conformity with article 103, and include fiscal policy co - ordination. so far, these broad guidelines have been very broad indeed. in the future, they should address individual countries more specifically. when a member state does not comply with the broad guidelines, specific policy recommendations can, and should, be given to the member state concerned. when appropriate, these recommendations should be published. the multilateral surveillance