their capital requirements after an adverse shock. especially in a situation where all banks are hit at the same time, this might amplify an economic recession and increase bank insolvencies rather than prevent them. of course this analysis is based on the assumption that banks can not easily issue new equity and that firms can not simply substitute bank credit with other sources of finance. the effect of capital scarcity leading to a'' credit crunch'' has been observed and investigated by in the literature by bernake and lown ( 1991 ) and calomiris and wilson ( 1998 ) among others. if there is a substantial cost connected to issuing new equity in bad times and if firms can not easily substitute bank finance by other sources, one has automatically a procyclical effect of bank lending no matter whether capital requirements are in place or not. however capital requirements may act as an amplifier. refining risk weights by making capital charges dependent on internal and external ratings may even exacerbate these effects because ratings also vary with the business cycle. preliminary evidence suggests that procyclicality is likely to increase under the new proposal in particular in crises situations ( see segoviano and lowe ( 2002 ) ). having said this, what conclusions shall we draw from this analysis? i don't have a definite answer but i think the concerns that have been raised in the discussion have to be taken seriously and we are challenged to think about approaches that could strengthen countercyclical regulatory instruments that encourage the build up of cushions in booms that can act as buffers when times deteriorate. making progress in this direction requires that we are able to improve the measurement of risk through time and in the assessment of the profile of macroeconomic risks ; an extremely difficult task ( see borio 2002 ). there are efforts to proceed in this direction in particular by work at the bis and at other institutions but there is still much to be done. some authors have argued that the procyclicality concerns are largely exaggerated because there are reasons to believe that a number of other factors can alleviate or even offset these effects. ( see borio 2002 ). i think we don't know the definite answer yet. theoretical arguments and the preliminary evidence combined should alert us that we have to make further progress on this issue. the role of central banks i have argued that there is a need to strengthen the system perspective on financial regulation and financial stability and that the regulatory instruments and objectives have to be complemented

dollar against the yen in october 1998 as an example for the logic described above. the dollar had been continuously appreciating in the years before the crash. in the summer of 1998 it was expected that the dollar would rise even further to the end of the year. in combination with a large interest rate differential between japan and the us, many traders took advantage of the situation by borrowing yen, buying dollar assets and make profit on the appreciation of the dollar as well as on the interest rate differential. this kind of trading strategy was pursued by banks, hedge funds and even by bigger corporations. when the russian default set in during august 1998 all agents that had participated in the so called yen - carry strategy in the months before were all simultaneously eager to unwind their dollar positions reinforcing the fall of the dollar and thereby deepening the crises. individually these strategies might have all been rational. what individual institutions and the weather paradigm of financial risks fail to take into account is the fact that the behavior of individuals changes the payoff distribution of all other individuals. since this externality is not taken into account by current risk management technology there are reasons to believe that the models will work poorly exactly when needed most : before and in times of crises. what conclusions can we draw from such an insight? i think the arguments put forward above support the point made in the beginning. if we want to design a regulatory framework that is able to act as a safeguard against financial instability a shift of perspective from individual institutions to a system level is essential. the current strong reliance on individual backward looking risk models has to be questioned and we have to think on how we can supplement such an approach by a form of aggregate assessment that takes the endogenous nature of risk into account as far as possible. summarizing these points i want to conclude that we have to ask ourselves whether we are at the moment perhaps relying too much on the use of internal risk models to determine capital charges. as i have argued, these models are rooted in a risk concept that is particularly misleading shortly before and in a crises because the endogenous nature of risk. at the onset of a crisis the process that drives the data on which risk assessments are based undergoes a structural break and changes its nature. if we fail to take these effects into account we are led to flawed and misleading risk assessments. the problem of hidden aggregate risk exposure another tension between the micro - and the macro - perspective exists in the field of banking supervision. current practice is mostly