economic developments. for supervision of the largest institutions, new quantitative efforts have been started to better measure counterparty credit risk and interconnectedness, market risk sensitivities, and funding and liquidity. the focus of these efforts is not only on risks to individual firms, but also on concentrations of risk that may arise through common exposures or sensitivity to common shocks. for example, additional loan - level data on bank exposures to syndicated corporate loans are now being collected in a systematic manner that will allow for more timely and consistent measurement of individual bank and systemic exposures to these sectors. in addition, detailed data obtained from firms ’ risk - management systems allow supervisors to examine concentration risk and interconnectedness. specifically, supervisors are aggregating, where possible, the banks ’ largest exposures to other banks, nonbank financial institutions, and corporate borrowers, which could be used to reveal large exposures to individual borrowers that the banks have in common or to assess the credit impact of a failure of a large bank on other large banks. additional time and experience with these data will allow us to assess the approach ’ s ability to signal adverse events, and together they will be a critical input to designing a more robust and consistent reporting system. furthermore, we are collecting data on banks ’ trading and securitization risk exposures as part of an ongoing, internationally coordinated effort to improve regulatory capital standards in these areas. moreover, analysis of liquidity risk now incorporates more explicitly the possibility of marketwide shocks to liquidity. this effort also is an example of the importance of context and the need to understand the firms ’ internal risk models and risk - management systems in designing data collection requirements. data that only capture a set of positions would not be sufficient since positions would not incorporate behavioral assumptions about firms, based on information about firms ’ business models and practices. the federal reserve ’ s responsibilities for monetary policy are also relevant for systemic risk monitoring. systemic risk involves the potential for financial crises to result in substantial adverse effects on economic activity. as the nation ’ s central bank, the federal reserve assesses and forecasts the u. s. and global economies using a wide variety of data and analytical tools, some based on specific sectors and others on large - scale models. in the wake of the crisis, research has been expanded to better understand the channels from the financial sector to the real economy. for example, building on lessons from the recent crisis, the federal reserve added questions to the survey of

##ation has started to emerge in the public debate and consequently proposals for deregulation and arguments for greater supervision discretion have been put forward. this discretion poses serious problems of transparency and of equal treatment, due to the temptation to shape the financial system by handing regulatory powers over to supervisory authorities. a clear distinction should be made between regulatory and supervisory functions. this segregation is key to ensuring a greater balance of powers and responsibilities, allowing proper accountability. 2. regulatory arbitrage the financial crisis also showed the limitations of decentralised supervision in a world of increasingly integrated financial markets and institutions. we are now in a process of moving from a situation in which the regulatory and supervisory frameworks were of national competence to a situation where there are common rules and in the euro area also a common supervisor. a need for greater cross - border integration of financial regulation and supervision emerged from the policy debate and motivated the still on - going reform of basel rules and the creation of the banking union in europe. however, the degree of implementation of the post - crisis global regulatory reform agenda across countries varies significantly, giving rise to regulatory arbitrage. this is reflected in the search for gaps in national legislation that justify avoiding compliance with previous international agreements, as well as in the behaviour of the authorities that accommodate specific requirements, conditions and interests of the major international financial conglomerates. it is very important to identify and assess what the risks and cost of regulatory arbitrage are. 3. regulatory flaws in the european regulation the current banking union framework suffers from a critical weakness : its micro approach to managing banking crises disregards the financial stability risks resulting from interventions in ailing banks. the current resolution framework does not envisage a credible public backstop and lacks government stabilisation tools. in fact, the framework governing intervention in problematic banks does not take into account the fact that the need to preserve financial stability must always prevail over the specific rules of intervention in banks. as recent cases illustrate, the european bail - in framework does not exclude bail - out events when financial stability issues ( or the public perspective of it ) are at stake. in addition, there is also the question of whether the lender of last resort is prepared and willing to lend all the liquidity that is needed when a bank is in distress but is still solvent. otherwise, the trigger for a banking failure is not insolvency but illiquidity. another limitation stems from the rules on mrel ( minimum requirement for own funds and eligible