reconstruction of devastated infrastructure as this had been largely accomplished before the program got underway. in fact, countries that were major aid recipients saw the government spending share of national income fall relative to other nations, the opposite of what one would expect if there had in fact been a shortage of public investment capital. so how did marshall aid matter? recently, there has been a shift among academics to what might be termed as a “ revisionist ” analysis of the contribution of the marshall plan to european recovery. according to this view, the plan ’ s main contribution was to alter the environment in which economic policy was made, tilting the balance in a qualitative manner rather than quantitatively. as you will recall, in 1947, two years after the war, europe was still characterised by macroeconomic instability, inflation and an increasingly tight balance of payments constraint. the initial response by governments had been to counter inflation by retaining controls, thereby prompting the growth of black markets and discouraging transactions at official prices. by distorting the allocative mechanism of the market, saving and initiative were discouraged. the appropriate response as prescribed by economic theory would have been to decontrol prices to induce producers to bring their goods to market. in addition, fiscal discipline and monetary restraint was necessary, in order to reduce inflationary pressures. such policies, however, require political compromise and sacrifice by everyone which at that time, when the needs of europe were greatest, were not necessarily forthcoming. the marshall plan may have played a critical role by easing decisions over the distribution of scarce resources. of course, the extended aid did not obviate the need for sacrifice but it increased the size of the distributional pie available to the various interest groups. in my opinion, however, the most important channel through which the marshall plan contributed is through its conditionality, with which the us was able to exercise significant influence over the economic policies of marshall aid recipients. although over the years the plan has become synonymous with the substantial aid flows transferred from the us to europe, it is useful to recall that before receiving that aid each recipient country had to sign a bilateral pact with the us. in that pact, countries agreed to balance their budgets, restore financial stability, stabilise the exchange rate at realistic levels and enhance mutual cooperation. along with the carrot, thus came the stick. in many ways this is similar to the approach followed in later years by the international monetary fund in its macroeconomic adjustment programs. not only could the marshall aid itself not

buffer. the new regulations involve a higher minimum capital ratio as well as heavier risk weights for specific activities. for proprietary trading, which caused large losses during the crisis, and investments in resecuritisations, a complex and relatively high - risk financial instrument, banks will have to hold much larger capital buffers. still, in good times, risks may again be underestimated. therefore the new regulations also set a limit for leverage regardless of risk weights. to further ensure the build - up of additional buffers in good times and enhance the capacity of banks to absorb losses in bad times, the basel iii framework introduces dynamic capital requirements. these come on top of the minimum capital requirements that must be met at all times and by all banks. the dynamic buffer consists of two parts. one part, the capital conservation buffer, relates the build - up of buffers to the profits of an individual bank. the other part, the countercyclical buffer, relates it to conditions in the economy at large. this is truly a novelty : for the first time in history, a macroprudential element has been included in international banking regulations. bis central bankers ’ speeches on top of the minimum and dynamic requirements, there will be a capital surcharge for systemically important banks. this will make those banks whose failure would pose the greatest threat to the financial system yet a little bit safer. the second key element of the current reforms concerns liquidity requirements. these are essential to make the financial system more stable. liquidity and maturity transformation is at the core of the banking business and provides a large benefit to the economy. it enables households and companies to earn interest on savings that they can access at any time, while providing essential long - term financing to the economy. however, when excessive, maturity transformation creates a vulnerability to market shocks and can become a source of instability to the financial system. during the crisis, insufficient management of liquidity risk emerged as a major problem. even well - capitalised financial institutions experienced liquidity problems and central banks needed to intervene, including with unconventional measures, to provide large scale financing and thereby prevent further escalation. therefore the new liquidity requirements, introduced as part of the basel iii framework, are of utmost importance. they require banks to hold sufficient high quality liquid assets to cover net cash outflows for a period of 30 days under a stress scenario. in addition, they set minimum requirements for the use of long - term and stable funding sources to finance