fundamentally weak spots in the international economy and the global financial system. in many cases the efforts to address them have only just got under way, while there is still much uncertainty about the effects of the measures. i will focus on two main challenges, first strengthening the banking sector and second enhancing macro - prudential oversight. strengthening the resilience of banks 11. banks were at the epicentre of the crisis. after the wave of bank collapses, nationalisations, conversions, break - ups, sales, bailouts – all of which impacted on the real economy – the financial and banking system seems to have stabilised and to be on its way to recovery. however, reforms are essential to make the financial and the banking system truly resilient during periods of stress. the basel committee on banking supervision has announced a comprehensive package of measures to strengthening the banking sector. the contents of what we now call basel iii were endorsed by the g20 world leaders, in seoul beginning of november. basel iii contains bankspecific reforms, the goal of which is to make banks more resilient to shocks. it also addresses system wide risks, as a bank - specific approach will not be enough. bank specific reforms 12. the core of the bank - specific reforms is stronger capital and liquidity regulation. raising the quality of the capital base has been one of the primary objectives of basel iii. in the future, the emphasis will be on core capital, that is common equity and retained earnings, and banks will have less incentive to attract lower quality capital. in line with these qualitative improvements is the increase in the minimum quantity of regulatory capital. for the first time, a hard minimum requirement has been set for core capital, namely 4. 5 % of a bank ’ s total risk - weighted assets. in addition, the committee has improved risk coverage of the regulatory framework and more improvements are on the way. the goal is to ensure that all material risks are captured. during the crisis, many risks were not reflected in the risk - based regime. capital requirements for trading book exposures as well as for complex securitisations and exposures to off - balance - sheet vehicles will be increased substantially, about three to four times the old capital requirements. 13. an additional element to the capital framework is a leverage ratio, which will serve as a backstop to the risk - based capital requirement. in the lead - up to the crisis, many banks reported very strong risk - based

about the developments that led to the crisis. the globalisation and integration of some parts of the global economy, like china and eastern europe, that had thus far been isolated was coupled with the build - up of global imbalances. excessive debt build - up in western, notably anglo - saxon, countries went in tandem with huge surpluses in oil - exporting countries and asian countries. asian countries stuck to a stable currency, causing the imbalances to continue and their currency reserves to accumulate. the investment of these reserves in the us kept us interest rates low, the socalled global savings glut, contributing to financial indiscipline in that country. loose monetary policy another cause 5. the accommodating monetary policy, particularly in the us, sowed the seeds for the imbalances. in the years before the crisis, money supply growth well outpaced potential gdp growth. this was not reflected in mounting inflation, because the supply of relatively cheap products from asia kept price rises moderate. nonetheless, the monetary expansion resulted in an acceleration of asset prices and credit aggregates. before the crisis, lending in industrial countries grew by around 10 % annually. the low interest rates and the abundant availability of credit encouraged a search for yield. risks were underpriced and bubbles could easily arise, especially in real estate. this was the case in the us but also in some european countries. with hindsight, the interest rates were too low to tame the monetary expansion and other, more macro - prudential, instruments should have been deployed to contain the credit expansion. what has been the impact of the crisis? serious damage in financial sector, partly at governments ’ expense 6. writedowns on securitisation products and on ordinary loans led to huge losses in the banking sector. banks worldwide have written down around usd 1, 400 billion. this blew big holes in their capital base, and in order to uphold confidence in the sector, governments rigged up extensive support programmes. some usd 500 billion was pumped into the banks, while bank debts and asset risks were guaranteed and deposit guarantees were extended. large amounts were required to stabilise institutions, relative to gdp especially in ireland, belgium and the uk. real economy hit hard 7. the current economic downturn is deeper, more prolonged and more widespread than those occurring after 15 previous crisis periods in history, according to a multi - country study by reinhart and reinhart ( 2010 ). this reflects the radical