among others, that banks maintain this margin is underlying uncertainty over risk exposures, valuations and earnings prospects. when as at present this uncertainty increases, the margin required by the market also rises. to a degree, this is unavoidable. but to reduce the tendency that market reaction lead banks to raise capital ( or reduce exposures ) to possibly inefficient levels in a systemic crisis, we need a more robust ex ante framework of transparency about risk exposures, along with provisions, margins and reserves for valuation uncertainty, than we have at present. the appropriate size for liquidity buffers is even harder to mandate, or to predict, than for capital buffers, given the unpredictable nature of shocks to market and funding liquidity, and the understandable reluctance of monetary authorities to create perfect certainty about when and how they will provide emergency liquidity. but, as with capital, greater ex ante transparency about banks ’ liquidity risk management frameworks, cushions and supporting arrangements should help reassure investors and counterparties and reduce the risk of sudden drains on liquidity, as well as the uncertainty that, over the past year, has led to wide and volatile liquidity premia in interbank funding markets. as we consider how to strengthen buffers, more thought needs to be given to how to promote higher buffers above the regulatory minimum in good times, and more flexibility for the system to make use of these buffers when they are comfortably above regulatory minima. both the banks themselves and their counterparties should be more confident about the banks ’ ability to draw on such buffers in bad times. banks will only be willing to do this if they do not fear they will be punished by the market – which brings us back to the importance of transparency improvements. if banks can credibly assure markets and their regulators that risks to their asset values and earnings prospects are being soundly managed and contained, then they may be able to survive a temporary decline in capital levels, while still above their regulatory minimum, during cyclical downturns. authorities will be closely monitoring banking conditions to inform decision on the best timing for introducing tighter capital requirements. we will not unduly burden financial institutions during the adjustment phase, but also not miss the opportunity of the next calm phase in financial markets to strengthen the structure of the financial system. pacing regulatory changes, but firmly committing to them, will contribute to reducing the potential for cyclicality in the system to be deepened by regulatory capital requirements.

distortions in the real economy, both during the upswing and during the subsequent retrenchment, and this is especially significant the more the financial system is leveraged. while we cannot and would not want to eliminate the bouts of optimism and pessimism that are part of human nature, we must address some of the pro - cyclical implications of our own policy making. the conviction of the fsf, called a year ago by the g7 to draft the first report in response to the crisis, is that, due in part to a perverse set of incentives, leverage had reached a level that was both excessive for the risk management capacity of many institutions, and misperceived in its real entity. therefore, improving the incentives in the system so that risks are appropriately managed and risk control frameworks keep pace with financial innovation ; improving the resilience of the system to shocks, whatever their source ; and introducing frameworks for dampening the cyclicality of risk - taking, have become the cornerstones of our work plan. our aim should be to produce a system more immune to the perverse incentives that we have seen, where leverage is lower, and where the sources of leverage and their associated risks are better identified and addressed. regulatory and supervisory changes will need to go hand - in - hand with enhanced transparency about risk exposures and valuations throughout the system. let me start with actions to improve incentives. under the umbrella of the fsf, and in a collaborative effort of national and international regulatory and supervisory authorities, we urged prompt implementation of basel ii, which will align capital requirements more closely to banks ’ risks ( and i will have more to say about this in a moment ). we also recommended strengthening basel ii with respect to capital charges for credit risk in the trading book, for resecuritised assets, and liquidity lines for off - balance - sheet vehicles. we encouraged the basel committee to strengthen liquidity management practices and buffers. we have called on financial institutions to align compensation better with long - term, firm - wide profitability, and recommended a range of measures to discipline the practices of credit rating agencies and to reduce regulatory reliance on ratings so that investors engage in proper due diligence rather than relying exclusively on ratings. we also set out several recommendations to enhance transparency and valuation practices. we outlined “ leading practices ” for disclosures by financial firms, and urged financial institutions to use these as part of their financial reports starting in mid - year