considers linkages among firms and markets that could threaten the financial system as a whole, and that watches for the emergence of risks that might not be apparent solely through examination of specific financial institutions. both objectives will require changes by the financial regulatory agencies acting under their existing authority, as well as new legislation to ensure that there is sufficient authority and accountability for the regulatory agencies in adapting their policies. i believe that a reform program is, in fact, taking shape, though important components remain the subject of debate within congress, the administration, and the financial regulatory agencies. while i do not have time today to cover everything that the federal reserve is doing, much less the activities of other financial regulators, let me describe some of our initiatives and identify some of the more important areas in which i believe that congressional action could be helpful. the federal reserve has worked with other u. s. and foreign supervisors to strengthen capital, liquidity, and risk - management requirements for banking organizations. there is little doubt that capital levels prior to the crisis were insufficient to serve their functions as an adequate constraint on leverage and a buffer against loss. higher capital requirements for trading activities and securitization exposures have already been agreed internationally. efforts to improve the quality of capital have made considerable progress, with a particular emphasis on the need for higher levels of common equity, which ultimately provides the greatest protection against losses for creditors or the deposit insurance fund. we are also working with our domestic and international counterparts to deal with the procyclical tendencies that characterize important areas of financial regulation, including capital and accounting standards. we must also adopt new regulatory mechanisms to counteract the systemic and too - big - tofail problems that became so embedded in our financial system. one possible approach is a special charge – possibly a special capital requirement – that would be calibrated to the systemic importance of a firm. needless to say, developing a metric for such a requirement is a new, and not altogether straightforward, exercise. another proposal, which strikes me as having particular promise, is that large financial institutions be required to have specified forms of " contingent capital. " one form of this proposal would have firms regularly issue special debt instruments that would convert to equity during times of financial stress. if well devised, such instruments would not only provide an increased capital buffer at the moment when it is most needed. they would also inject an additional element of market discipline into large financial firms, since the price of those instruments would reflect market perceptions of

carlos da silva costa : the importance of strengthening european integration to ensure the success of the portuguese adjustment article by mr carlos da silva costa, governor of the bank of portugal, published in diario economico newspaper, 31 december 2012. * * * the flaws in the architecture of the european economic and monetary union today it is clear that the architecture of the economic and monetary union was flawed and incomplete from the start, which made it unable to ensure economic and financial stability when exposed to abrupt changes in market uncertainty and risk perception. in some cases, these flaws have heightened the difficulties faced by member states, which in turn explains why the contagion effects among euro area economies have surpassed expectations. the flaws in the architecture and institutional framework supporting the establishment of the economic and monetary union necessitate an urgent rethink of this model to ensure that the euro area is stable and resilient both to common and specific exogenous shocks and to risks of inconsistency among the policies of the various economies. this is to ensure that the construction of the euro area is supported by all pillars determining its stability and resilience and that it relies on rules and institutions controlling the mutual interdependence between the stability of the whole and each of its parts. the construction of a new future for europe the flaws in the architecture of the euro area and the lack of appropriate rules and institutions to promote the stability of the whole and its parts explain why the sovereign debt crisis was deeper and more protracted than initially expected. these flaws also explain why resolving this crisis and restoring sustainable and job - creating growth in europe requires measures both at national and european level. in the euro area, these two dimensions complement and determine each other : the stability of the whole does not tolerate a lasting divergence / instability in one of its parts. likewise, the stabilisation of one of its parts depends on the nature of the impulses it receives from the whole. national policies to restore debt sustainability first, the countries that have accumulated significant macroeconomic imbalances in the past and that were faced with market - based funding constraints in the context of the current crisis need to adopt policies to restore public debt sustainability, financial stability and competitiveness, thereby recovering their credibility and confidence. this is the case of portugal. the strategy established in the economic adjustment programme for portugal – which relies on fiscal consolidation, financial stability and structural reforms – is crucial to eliminate the macroeconomic imbalances and structural blockages that have led us