the financial system has already overcome the crisis. first of all, the major central banks are left with balance sheets that have ballooned. the amount and the structure in question differ in line with the diverging strategies pursued. nevertheless, this applies to all major central banks, including the european central bank. we firmly believe that these inflated balance sheets should not belong to a state of new “ normal ”. in the long run, the persistent burden of inflated balance sheets might jeopardise the credibility of monetary policy. this is all the more the case as the independence of central banks and their capacity to act appear to be crucial. last week, the european central bank increased its key interest rates, ending the period of almost two years in which rates were at an all - time low level. the monetary policy stance remains accommodative. to preserve its contribution to growth and employment, it is essential that inflation expectations remain anchored in spite of recent price developments. it goes without saying that we did not complain about the headline of the financial times ’ article on the rate hike. the article was entitled “ ecb becomes bundesbank ”. second, public indebtedness has reached critical levels in many countries, giving rise to doubts about sustainability. public finances are already facing huge challenges posed by rigid structural deficits and demographic developments, and the strains have been further aggravated by the transformation of private debt to public debt in rescuing financial institutions and by high expenditures to avert recession. in europe, we understand the current debt crisis as the third stage of the crisis. finally, large parts of the financial systems may seem, at a first glance, to be working well again. nevertheless, moral hazard is still prevalent in the markets, fuelled by the implicit assumption in the markets that governments will rescue banks, if needs be, by spending bis central bankers ’ speeches taxpayers ’ money. and by holding down interest rates and the cost of carry central banks may again be encouraging risk - taking that might sooner or later lead to a resurgence of high leverage and, with it, new excesses. acknowledging all the progress that have been made in the global banking system, especially in raising capital buffers and in sound liquidity management, there is still a long way to go in creating proper incentives in the financial sector. in one major respect, germany has become a frontrunner. at the beginning of this year, the german government introduced a new resolution scheme which facilitates the restructuring of distressed banks at the cost of

reform measures aim to tighten capital requirements, both in terms of quantity and quality. the significant enhancements made to the original basel ii framework will lead to a new set of rules that has therefore rightly been termed basel iii. after the promising consensus achieved at the summit in seoul, the task is now to transpose the g20 agreement into national law. of course, the increased requirements are associated with adjustment costs for financial institutions. yet, a number of studies have been conducted. the investigations have shown these costs to be manageable, not least due to the lengthy transition phase that will attenuate the adaptation process. even the distinctive features of the tripartite german financial system have been taken into due consideration. the sector ’ s profitability will probably decrease, yet so will fluctuations, thereby supporting continuous growth. impacts on cost of credit and thus on the real economy will, however, be limited. fears of dire consequences therefore appear exaggerated, and banks should instead embark on the task of adjusting to the new requirements at an early stage. however, the increased risk buffer in the shape of higher capital requirements is no panacea. it is a central lesson from the crisis that a second line of defence is needed to prevent individual banks that still fail from triggering a systemic crisis. this issue is particularly acute in the case of systemically important financial institutions ( sifis ). the discussion of how best to treat them is still ongoing, but the contours of the future framework are taking shape now that the g20 summit has endorsed the fsb ’ s sifi recommendations : a core policy instrument are resolution regimes that are tailored to the particularities of the financial system and that allow to resolve even systemic financial institutions without endangering the functioning of the financial system. higher capital requirements in a variety of forms are a suitable instrument to increase the loss absorption capability of sifis and, at the same time, to counter moral hazard by pricing in their externalities. however, important details of these sifi recommendations and corresponding policy measures still need to be agreed on, and some questions remain unanswered. one important issue is how to measure systemic relevance and how to translate this into regulatory and supervisory action. the crisis has also demonstrated that systemic risks have been shifted out of the regular and therefore regulated banking sector into the so called shadow banking system. this underlines just how important it is to complement traditional microprudential institutional supervision by macroprudential oversight. yet for this new