truly universal. procyclicality strictly speaking, procyclicality is a tendency of financial systems to fluctuate around a trend with the economic cycle. by extension, procyclicality can encompass all “ amplification mechanisms ” through which an initial shock results in wider movements in asset prices, credit flows, market liquidity, and, possibly, the real economy. our accounting and prudential regimes have increased procyclicality in recent years. in a mark to market environment, asset prices movements quickly translate into changes in the capital base of financial institutions. this, in turn, triggers additional demand for assets and a further increase in their prices. this kind of “ inverted demand curve ” ; where demand increases with prices, may create the conditions for deep and lasting financial instability. addressing procyclicality caused by the regulation itself is therefore a priority. the first line of defense against procyclicality should be the accounting framework. i strongly support the current focus on changing the accounting rules. more precisely, moving from an incurred loss model to a forward looking model is essential. we need a robust, auditable and straightforward provisioning system at the accounting level based on a forward looking model that would allow provisioning efforts commensurate with credit risks through time. this framework should also be simple, bearing in mind the ultimate objective of creating synergies between prudential and accounting standards. the basel committee is working on a very comprehensive approach, which is casted in its “ principles for revision of ias 39 ”. accounting standard setters have also been working hard. i firmly believe that two steps are required going forward. one is that the iasb should follow the principles by the basel committee. another is that the iasb and the fasb should adopt a common methodology regarding provisioning based on expected credit losses. this is a precondition to ensure that the g20 countries have convergent accounting systems. some of the procyclicality can also be trimmed through prudential regulation. efforts to make solvency ratios potentially less procyclical are welcome and should be pursued. in particular those efforts aimed at imposing a measure of risks “ through the cycle ” or “ downturn ” are useful. other options to take some of the procyclicality off through prudential standards include a fixed buffer, which would act as a capital conservation device. i see some limitations to such an option. it is hard

significant macroeconomic consequences and these should be factored in when designing and implementing them. while the crisis has clearly had global ramifications, its impact on financial systems was not uniform across the world. differences in financial structures do matter. banks remain central in our financial systems : this is especially true for continental europe where they are responsible for more than 80 % of financial intermediation. these differences suggest that we should be careful in crafting the regulatory answer to the crisis. our experience in france is that our banks ’ universal model has weathered the storm relatively well. it would be a major paradox to put in place rules which would challenge such universal models. there needs to be scope for different countries to tailor solutions to their circumstances, while at the same time doing so within a globally agreed framework. many banks have improved significantly their capital position through raising high quality capital. yet, banks may not feel comfortable if their new capital position is barely above the new minimum. indeed, a critical issue going forward relates to the behavior of banks with respect to capital buffers they retain on top of the existing minimum. if banks target buffers above the regulatory minimum, which is an endogenous market outcome, they may need to raise even larger amount of equity than what can be expected just looking at the current package. on the one hand we know from empirical studies that weaker capitalized banks typically exhibit weak loan growth compared to other better - capitalized banks. on the other, banks may find it less costly to adjust loan volumes and loan pricing than capital, as frictions in the market for bank capital make the latter option more expensive. finally, any regulatory framework needs to manage avoidance and regulatory arbitrage, and keep up with innovation and other forms of structural change. for this, a necessary, but not sufficient condition is that standards are comprehensive in coverage and consistent across jurisdictions. i am not sure, for instance, that the leverage ratio, if it was to be implemented as a compulsory instrument, would meet this double test. at the current level of accounting divergences, consistency will be very difficult to achieve. furthermore, there is a risk that it would encourage migration of credit activities towards other – less regulated – parts of the financial system. it is therefore important that consistency apply across standards and countries. convergence between accounting standards is a precondition for a consistent implementation of some of the prudential reforms discussed by the basel committee. it is also essential that new prudential standards for banks become