- long consequences for economic developments. all that said, however, the challenges facing banks today require a broader set of instruments than those used by the nordic authorities 20 years ago, for two main reasons : first, the situation for banks is more complex. the authorities have to distinguish more clearly between insolvent banks and banks that are solvent but in need of more capital in order to increase lending. the lessons from the nordic banking crisis can be drawn on for the insolvent banks. for the solvent banks, the challenge is to maintain their lending capacity. this is particularly important given that other credit markets are not functioning normally, so that it is difficult, or impossible, for businesses to acquire funding directly from bond markets. but without more capital, the banks are not willing to accept new loans on their balance sheets. the main challenge facing the authorities today therefore is to ensure that solvent banks increase their financial strength and thereby their lending capacity. at the same time, it is important to have an exit strategy so that capital injections today do not translate into an increase in state ownership when the crisis is over. second, cross - border banking has been increasing. twenty years ago, all the main nordic banks were national banks. today, for example, four of the five largest banks in norway are foreign - owned ( three branches and one subsidiary ). a national authority cannot be expected to bolster the financial strength of branches of foreign banks : indeed, it could be complicated to do this even for foreign - owned subsidiaries. while we were able to choose national solutions to the banking crisis 20 years ago, any effective solution to today ’ s situation will require an internationally harmonised approach. as today ’ s financial crisis progressively gets resolved, it will be necessary to start the process of preventing future crises. this will require substantial reform of the regulatory framework. banks will have to strengthen their capital and their liquidity buffers. and financial regulation must have a less pro - cyclical effect. the objective must be to enable the banks to curb the impact of shocks on the economy, rather than to amplify them, as is the case now, where negative spirals are generated between the financial system and the real economy. because of the global character of today ’ s financial crisis, the authorities must work in concert to find solutions, both in terms of recapitalisation of the banks and regulation of the financial sector.

while progress on a national level has been remarkable in many countries, obstacles to effective cross - border resolution remain. thus, one of our main tasks in the coming months will be to establish and ensure mutual compatibility between different national restructuring and resolution mechanisms. yet we should bear in mind that an orderly resolution of financial institutions which are truly active on a global level may be possible only to a certain degree. at the european level at least, the proposed european commission legislation, which is due before this summer, looks to represent a major step forward. 3. 3 let ’ s not overlook the shadow banking system the third regulatory challenge i want to address is the necessity to extend our reform efforts beyond the banking system. the stricter rules imposed on banks via basel iii and the rules for sifis entail the realistic danger that activities will be shifted to less regulated areas. therefore, it is imperative for us to better illuminate the fringes of the financial system. in other words, we must closely monitor and regulate what is commonly referred to as the shadow banking system. whether a market participant is classified as belonging to the shadow banking system should depend not so much on its institutional type but on its activities. at the behest of the g20, the fsb is currently exploring ways and means of monitoring and regulating the shadow banking system. it has recently defined the term shadow banking as “ credit intermediation involving entities and activities outside the regular banking system ”. 2 this rather broad definition involves non - banks such as special purpose vehicles and money market funds, but also hedge funds. the fsb will present a set of recommendations to the g20 in autumn of this year. what is already obvious today is the need to significantly enhance transparency by imposing appropriate registration requirements as well as reporting obligations on all parts of the financial system. yet better monitoring will not be enough. to reduce systemic risk, better regulation of the shadow banking system will be necessary too. this could be done either directly, by regulating the activities and actors of the shadow banking system themselves. or indirectly, by regulating banks ’ interactions with the shadow banking system. need for international cooperation let me close by emphasising once more the urgent need for international cooperation. more than 4 years after the outbreak of the crisis, we are now at a crossroads. our cooperation in see fsb, shadow banking : scoping the issues, a background note of the financial stability board, 12 april 2011. bis central bankers ’ speeches the coming months will decide