##nified by the fact that the debt structures in a number of countries are still quite vulnerable to foreign currency, liquidity, and interest rate risk. the substantial share of public debt denominated in foreign currency - 70 percent on average for the lowest rated group of borrowers - and the relatively short maturity of the debt stock mean that a relatively modest shock can produce a substantial increase in debt burdens, raising the amount of fiscal effort needed to keep the debt stock on a stable or declining path, and increasing the economy ’ s vulnerability to a crisis. • in some countries, the fiscal trajectory is too weak to place the debt - to - gdp ratio on a sustainable path. in others, the fiscal position is strong enough to stabilize the debt dynamics, but provides little buffer against adverse shocks, and very little room for fiscal policy to help cushion the effects of such a shock. • important challenges remain in the financial area as well. in many countries, large public sector debt burdens have left banking systems highly exposed to the sovereign, constraining authorities ’ room for maneuver. there are also problems in banks ’ corporate and consumer loan books, and a number of banking systems also have a large share of foreign currency denominated liabilities, in some cases held by non - residents. • the durability of recent improvements in external positions, which reflect weak domestic demand in many countries, is also open to question. as domestic demand strengthens, external balances could move into deficit again, which in some cases will reintroduce a greater external risk. • and in many cases, the financial exposure of the imf and the multilateral development banks is already high. these balance sheet challenges took a long time to develop, and they will take a long time to reverse. they are the legacy of years of past fiscal decisions, magnified by the impact of crises on growth, the exchange rate, and the financial sector. they leave an exacting set of policy challenges. they raise the risk that future shocks to domestic confidence or adverse changes in the external environment could lead to new pressures on exchange rates, on interest rates, and on the capacity of countries to fund themselves on sustainable terms. apart from the risk of crisis, these debt levels are large enough to depress domestic investment and long - term growth prospects. in part because of these balance sheet and debt burdens, many emerging market economies face a protracted transition before they can expect to be comfortably considered stable investment grade credits, with

credit ratings regime. this led to inflated credit ratings for many mortgage securitizations that subsequently performed poorly as mortgage delinquencies increased. there were significant problems in funding and derivative markets, including flaws in tri - party repo, money market mutual funds that were vulnerable to runs, and massive and opaque bilateral otc derivative exposures. finally, all of these problems were magnified by the lack of a good resolution process for large, complex financial firms that got into trouble. as a result, policymakers were forced to develop ad hoc interventions to contain contagion and to prevent the collapse of the u. s. financial system. we should never forget how close we came to a full - blown depression, and we must resolve to never allow a return to conditions like those that existed prior to the financial crisis. that said, it is entirely appropriate to take a critical look at the changes that were made to the regulatory regime. while we do not yet have evidence of how these reforms will hold up during the next economic downturn, many have been in place long enough that we can begin to evaluate their efficacy. in such an evaluation, we should keep in mind the three goals i mentioned in my introduction. first, we must ensure that the probability of failure for a systemically important firm is exceedingly low. such a failure can lead to contagion that can damage a broad set of financial market participants, and impede the ability of the financial system to support the economy. the failure of a single systemically important firm — because of its size and interconnectedness — can significantly weaken the entire financial system. we saw this firsthand following the failure of lehman brothers. second, if a systemically important firm does fail, we must have mechanisms in place to minimize the damage to the rest of the financial system. while we can make individual firms stronger, more robust and less prone to failure, i expect that there will still inevitably be failures in the future. in principle, we could make individual institutions completely bulletproof in all possible environments. however, this would require such high levels of capital and liquidity that it would likely make them uncompetitive in their ability to provide financial services to their customers. 2 / 6 bis central bankers'speeches third, we must keep in place the structural changes that have made the global financial system less vulnerable to adverse shocks. so, what does this imply when we consider revisions to the dodd - frank act and other aspects of reform?