magically disappeared from internal risk reports and capital, only to reappear as basis risk, counterparty credit risk or illiquid positions that could not be sold. many supervisors did not do enough to prevent this compression of risk - weighted assets. from a macro prudential perspective, we again saw a cycle of leverage building up in the banking system, which the market forced down in the most destabilizing manner, amplifying procyclicality and the downturn of the real economy. moreover, market participants piled into what were perceived to be the lowest risk - weighted assets, such as repos, sovereign lending, and triple - a asset backed securities. while these assets may have been viewed as low risk at the bank level, we instead saw the build - up of system wide risks in these asset classes, which ultimately came back to haunt many institutions. buffers to withstand shocks another objective is the need to build greater buffers into the banking sector to withstand severe shocks. banks are at the centre of the credit intermediation process, both in bank dominated countries and those where capital markets are more developed. greater buffers will help prevent the amplification of shocks between the financial and real side of the economy. these buffers need to take various forms. first, we need to introduce more forward - looking provisioning. the committee is promoting stronger provisioning practices through a number of channels. it is working closely with the accounting standard setters to develop a robust and operational expected loss approach for provisioning. second, we need to introduce more, prudent valuation practices for financial instruments. the committee last year issued guidance to banks and banking supervisors to strengthen valuation processes. the committee also continues to work with the accounting standard setters to develop sound valuation standards. these should provide for valuation adjustments to avoid the misstatement of both initial and subsequent profit and loss recognition when there is significant valuation uncertainty. third, there needs to be a capital conservation buffer as proposed in our december reform package. at the onset of the financial crisis, a number of banks continued to make large distributions in the form of dividends, share buy backs and generous compensation payments even though their individual financial condition and the outlook for the sector were deteriorating. more recently, many banks have returned to profitability but have not done enough to rebuild their capital buffers to support new lending activity. this dynamic does not help to make the system more resilient and it amplifies procycl

transition period to the new standards. we will ensure that the banking sector can move to the new standards through earnings retention and reasonable capital raising. we will also ensure that banks can move to the new liquidity standards in an orderly manner. when it comes to the long term costs, the impact is not clear. on the one hand, higher capital requirements and liquidity standards could increase the cost of funding. on the other hand, more stable, less leveraged banks would raise average ratings, improve the terms on which banks could raise funds, and lower the required return on equity. moreover, in a competitive market, it is not at all clear that most of the costs of higher capital and liquidity requirements would be passed on to the consumer. one thing however is clear. raising minimum capital requirements from their current levels will involve large and permanent net benefits by raising the stability of the system and promoting more sustainable growth. moreover, these benefits accrue immediately for every additional dollar ( or euro ) of capital and liquidity. this is critical in an overall economic and financial environment of continued uncertainty and risk. it is absolutely essential – indeed it is our duty to shareholders, taxpayers and future generations – to reflect on the lessons of this crisis to safeguard against something like this happening again. we have a common goal and we must work together to achieve it.