yet certain areas still need a lot more work. i would like to discuss two of these issues here today : the “ too big to fail ” problem and the shadow banking sector. still “ too big to fail ”? the “ too big to fail ” problem was a key factor in the recent crisis, and it still isn ’ t completely solved. but first let ’ s take a look at the essence of this problem. participants in the financial system are highly interconnected. if a bank runs into trouble, this will also affect its counterparties. and if the bank in question is particularly large or has an especially high number of counterparties, its woes can destabilise the entire financial system. bis central bankers ’ speeches we saw how devastating this scenario can be in 2008, when lehman brothers became insolvent. in such cases, the state may have no option but to bail out the distressed bank in order to prevent an escalation of the crisis. such bail - outs are, of course, extremely costly ; in 2010, ireland was obliged to spend more than 30 % of its annual gdp on bail - outs for stricken irish banks. and these costs are ultimately borne by none other than the taxpayer. but this policy not only comes at a cost to the taxpayer ; at a deeper level, it also changes the structure of the financial system. large and interconnected banks enjoy an implicit state guarantee. if they run into difficulties, they can always count on the state bailing them out – they are “ too big ”, “ too interconnected ” or simply “ too important ” to fail. this encourages large and interconnected banks to enter into high - risk transactions. if these transactions are successful, the bank will reap the benefits ; if they make a loss, the taxpayer may ultimately have to foot the bill. large and interconnected banks therefore intrinsically pose a risk to financial stability. at the same time, this is precisely why they engage in such risk - taking in the first place – which all makes for a dangerous feedback loop. so how can regulation help? one option would be to prevent large banks from becoming distressed in the first place. notably, the new basel iii capital requirements are an important step in this process. but can they rule out bank failures altogether? and should we even try to do so? my answer to both of those questions is a resounding “ no ”. of course we can ’ t rule out bank failures entirely, and nor should

banking system may then spill over into the regular banking system. the latter is linked to the shadow banking system through a number of channels. partly this is because banks are directly involved in shadow banking. at the same time, many banks are connected indirectly to the system through liquidity facilities, claims on shadow banking participants and common exposures in individual markets. thus, the shadow banking system may well be a source of systemic risk. accordingly, it is very high up the g20 reform agenda. in november 2010, the g20 asked the financial stability board and other international standard setters to develop approaches to ensuring better supervision and regulation of the shadow banking system. in this connection, let me be absolutely clear : the purpose of regulation is not to proscribe shadow banking activities or to drive participants out of the market when such activities and participants engender no systemic risk. the sole aim of regulation is to put a brake on systemic risk. there are essentially two approaches : a direct one and an indirect one. indirect regulation is aimed at the regular banking system and tries to keep a check on its links to the shadow banking system. direct regulation, on the other hand, takes direct aim at shadow banking participants and activities. in terms of indirect regulation, some progress has been made in the reforms to the basel framework. for instance, capital requirements for various connections to the shadow banking system were increased – including for risks arising from securitisation and from liquidity facilities for securitisation vehicles. in addition, banking supervisory liquidity ratios may help to stem systemic risk – where macroprudential considerations are factored into defining them. money market funds constitute one example of direct regulation of participants. us money market funds in particular bear a strong resemblance to banks. for investors, there is very little difference between these funds and a bank account – including access to cash at atms. the main problem comes with money market funds which operate with constant share values, such that investor deposits have a constant value. with funds like this, losses are not distributed evenly across all investors. instead, a “ first come first served ” rule applies. those who withdraw their deposits first get back the full amount, while those who act too late have to accept corresponding losses. this rule makes such money market funds susceptible to runs. bis central bankers ’ speeches therefore, a shift to money market funds which operate with variable share values is an important step in making the sector more stable – in these funds, losses are shared evenly by