feasible to extend capital requirements to institutions such as hedge funds or private equity firms. but supervision has to ensure that counterpartycredit risk management in the regulated institutions contains the level of overall exposure of the regulated to the unregulated. prudent counterparty risk management, in turn, will work to limit the risk of a rise in overall leverage outside the regulated institutions that could threaten the stability of the financial system. supervision has to explicitly focus on inducing higher levels of margin and collateral in normal times against derivatives and secured borrowing to better cover the risk of market illiquidity. greater product standardization and improved disclosure can also help, as will changes to the accounting rules that govern what risks reside on and off balance sheets. finally, central banks, governments and supervisors have to look much more carefully at the interaction between accounting, tax, disclosure and capital requirements, and their effects on overall leverage and risk across the financial system. capital requirements alone are rarely the most important constraint. the president's working group on financial markets and the financial stability forum has laid out a very detailed list of reforms to begin this process. and we are fortunate to have jerry corrigan engaged in working to shape a set of recommendations to help us get the balance right. regulatory structure apart from the mix of incentives and constraints set by regulatory policy, the structure of the regulatory system in the united states needs substantial reform. our current system has evolved into a confusing mix of diffused accountability, regulatory competition, an enormously complex web of rules that create perverse incentives and leave huge opportunities for arbitrage and evasion, and creates the risk of large gaps in our knowledge and authority. this crisis gives us the opportunity to bring about fundamental change in the direction of a more streamlined and consolidated system with more clarity around responsibility for the prudential safeguards in the system. in this regard, secretary paulson's blueprint outlines a sweeping consolidation and realignment of responsibilities, with a clear set of objectives for achieving a better balance between efficiency and stability, between market discipline and regulation. this proposal has stimulated a very constructive set of discussions, and will help lay the foundation for action when the dust settles. the most fundamental reform that is necessary is for all institutions that play a central role in money and funding markets – including the major globally active banks and investment banks – to operate under a unified framework that provides a stronger form of consolidated supervision, with appropriate requirements for capital and liquidity. to complement this, we need to

##erabilities. political winds are becoming tailwinds. there is newfound confidence in the reform process, and newfound support for european cohesion, which could help unleash pentup demand and investment, if confirmed by decisive action. still, the implementation of structural reforms needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost productivity growth. regarding fiscal policies, all countries would benefit from intensifying efforts towards achieving a more growthfriendly composition of public finances. a full, transparent and consistent implementation of the stability and growth pact and of the macroeconomic imbalances procedure over time and across countries remains essential to bolster the resilience of the euro area economy. 2 / 2 bis central bankers'speeches