balance sheets may take a protracted period of time. there are differing views as to the origins of the global financial crisis, but it is widely accepted that that a combination of weak or light - touch regulation of the banking system, coupled with some rather questionable innovations in the banking sector, were at the epicenter of the crisis. the sub - prime crisis which originated in the united states showed how such innovations could have global repercussions. it became clear in the aftermath of the crisis that many of the senior bank executives did not fully understand these complex products and the risks associated with them. this led to a breakdown of trust between banks, as they did not know what was lurking on the balance sheets of banks they were lending to in the interbank market. it also became clear that in some jurisdictions, prudential oversight was inadequate and that the “ light touch ” regulation approach did not work. but with the increased complexity of products it was little wonder that the regulators could not keep up with financial innovation. the real impacts of the crisis were amplified by financial flows, where the motto was “ bring cash home ”. fund managers in the advanced economies repatriated their investments, and a study by philip lane has argued that the most dramatic turnaround in capital flows took place with respect to banking - sector flows, with foreigners draining liquid funds from local stressed banks, and domestic investors draining foreign liquid assets. as lane notes : “ in both directions, banks were the main proximate investor in other banks, so were instrumental in the cross - border retrenchment as part of the general breakdown in interbank markets during the crisis. while individually rational, the collective exit from these markets contributed to the illiquidity problems that defined the acute phase of the crisis. given the lack of an adequate international regulatory framework, cross - border liquidity runs were more difficult to forestall than domestic liquidity runs. ” other research also showed that banks were most likely to withdraw capital from countries that were geographically more remote from the home market. the global nature of the financial crisis also meant that solutions needed to be global, with a reversal of the lax regulatory environment that emerged in the years preceding the financial crisis. banks and other financial institutions had become larger, and they crossed national boundaries with branches and subsidiaries all over the world. this made it more difficult to regulate them, as different countries had different regulations, and banks often engaged in regulatory arbitrage. in an attempt to restore trust and to

ensure that banking excesses bis central bankers ’ speeches would not be repeated, various fora, including the g20, the basel committee for banking supervision and the financial stability board ( fsb ) engaged in revising regulations and standards. regulation has become more stringent with the impending introduction of what is known as the basel iii framework. there was, however, always a concern that the regulatory pendulum would swing too far in the other direction, and there is the danger that their implementation may further impede the slow global recovery. in the eurozone for example, the need to increase bank capital has contributed to the reluctance of banks to lend. higher capital adequacy ratios are ideally achieved through raising capital, but in the prevailing economic climate this is difficult and expensive. banks have consequently been adjusting to these tougher ratios either through selling off some of their assets or by reducing their lending or both. the continuing crisis in europe is in part a function of continued bank deleveraging, and has required at times extraordinary intervention from the ecb. mario draghi, for example, reported in davos earlier this year that a “ major, major credit crunch ” had been avoided in europe, following the €489bn emergency loans to eurozone banks in december 2011. our concern has been that changes to the basel committee rules to which south africa subscribes, are intended to solve problems in the banking systems of some of the advanced economies, but would apply equally to countries such as south africa, that did not experience these excesses. in other words, the changing regulation would solve problems that we did not have, and could in fact cause unnecessary difficulties for the banks and for the broader macroeconomy. to some extent the revised principles have proved to be challenging, but we are nevertheless expected to abide by them as members of the fsb and the g - 20. some aspects of these changes could have significantly negative implications for our banks and for the economy in general if applied in the forms that are currently being proposed. we are committed to meeting the basel iii requirements, and are actively working with the global policy makers to see how these proposals can be modified or allow for country discretion in their application. but this is an example of how global solutions if applied indiscriminately to all countries, even to those such as south africa that did not experience regulatory failures, could have adverse consequences for some. the basel iii accord provides for high capital ratios in order to ensure that banks