of the money market and supplied the financial system with ample liquidity. despite the success of this policy in preventing a systemic breakdown, one should not forget the risk of adverse side effects in the long term. sticking to non - standard policy measures for too long will not only change the perception of risk in financial markets in an undesired manner but will also preserve inefficient banking structures. history tells us this has been a key mistake in the aftermath of past financial crises. consequently, the question is not whether an exit from non - standard monetary policy is necessary, but when it will take place. fiscal policy, too, contributed significantly to preventing a downward spiral at the height of the crisis. it helped shore up the financial sector through guarantees, recapitalisation schemes and the set - up of bad banks to relieve banks ’ balance sheets, and it supported aggregate demand through automatic stabilisers as well as discretionary measures. how effective have these discretionary measures been? during this conference walker and others argued that the presence of a fiscal multiplier larger than one is far from certain. other papers presented during the conference clarified the conditions under which fiscal multipliers may be large. one key aspect is the zero lower bound on nominal interest rates, which may amplify the effects of fiscal policy, at least in the short run. let me add something on a personal note : what i learned during my years in government is that in normal times discretionary fiscal policy is surely not an advisable tool of stabilisation. far too many lags exist that reduce the effectiveness of expansionary measures. moreover, looking at the long term, we have to bear in mind that political economy mechanisms bias fiscal policy towards incurring deficits. however, in an exceptional crisis things are slightly different and it cannot be denied that discretionary fiscal policy had a stabilising effect. in this connection the zero lower bound is certainly a critical aspect, although its relevance might be larger for the united states : eurosystem experience shows that the lower bound rendering monetary policy ineffective might be less of an issue than commonly believed in the pre - crisis mainstream view. at least, non - standard measures seem to have prevented a given monetary policy stance – set by traditional interest rate instruments – from becoming overly restrictive during the crisis. the sovereign debt crisis strongly reminded us that, in the long run, only sound public finances provide the necessary room for manoeuvre when a major shock occurs. and

instruments have to be very clear that they are at risk of conversion or write - down. we cannot have a situation where holders gamble on an assumption that the trigger will not be pulled – it will. canada introduced the “ asset - to - capital ” multiple in the early 1980s. the definition pre - crisis was defined as on and some off - balance sheet exposures as a ratio of total capital. generally, this was set at the assets being no more than 20 times the total capital amount. however supervisory discretion could permit a higher multiple ( up to 23 times ) if the firm met certain conditions. in the us a minimum everage ratio was introduced in the early 1980s. pre - crisis, the definition used was tier 1 capital / on - balance sheet assets, as measured under us gaap. firms had to meet a 3 % ratio if considered “ strong ”, and 4 % otherwise. bis central bankers ’ speeches on the form and use of capital instruments, the basel i accord also allowed hybrid debt capital instruments to support the required deductions from the capital calculation, such as goodwill, expected losses ( introduced later under basel ii with the internal models regime for credit risk ) and investments in other banks ’ capital instruments. however, as a matter of fact, rather than reporting, any losses arising from these items hit common equity because it will absorb losses first in the going concern state, according to the hierarchy of the capital structure. as a result applying these deductions at the level of total capital, or tier 1 capital, has the effect of overstating the core equity capital ratio. the accord therefore incentivised wrongly the issuance of hybrid debt capital instruments to cover deductions. a further flaw was that deferred tax assets were not deducted from capital and minority interest assets were recognised in full. this, too, was a mistake. dtas depend on future profitability ( which is not assured ) and minority interests are not fully transferable to absorb losses for a group. last on the capital side, there were problems starting in the original basel accord in relation to the treatment of provisions. under the current international accounting standards provisions are based on incurred rather than expected losses. as a consequence, the bank capital framework de facto becomes a partial substitute means of achieving more forwardlooking provisioning, through the internal models regime for credit risk which requires the deduction from capital of expected losses in excess of provisions. a forward - looking approach to provisioning based on