- sensitive application of basel capital standards. and, last but not least, large exposures of banks vis - a - vis counterparties of the shadow banking system need to be adequately measured and controlled by looking through complex investment structures. finally, the effectiveness of regulatory requirements with regard to shadow banking must be constantly assessed and their implementation should be peer reviewed at the global level. as outlined, addressing the liquidity risk of money market funds, procyclical credit expansion via securitised financing, and interconnections between banks and shadow banks are key regulatory reforms. adequately regulated, it should be possible to effectively mitigate systemic risks posed by such non - banking financial institutions and enable them to affect financial stability more positively. bis central bankers ’ speeches

the business models, of such large international banks. since the adoption of the international basel ii framework in 2005, the complexity of these rules has mushroomed. the basel iii reforms launched in response to the last financial crisis – including the final elements of the basel iii package that we are currently negotiating in basel – have made the rules even more detailed and complicated. we have the guiding principle of the reforms to thank for this : risk - oriented governance and 1 / 4 bis central bankers'speeches regulation are there to help banks allocate capital resources as efficiently as possible. but in order to prevent undercapitalisation, this approach needs very specific rules. this increases the compliance workload – that is, the effort associated with meeting the requirements as well as demonstrating that they ’ ve been met. the basel rules were made for large, internationally active banks – they were not designed with small banks in mind. yet, in europe, we adopted these rules for all european credit institutions alike – including the thousands of small and medium - sized banks with simple business models and regional focus. the motivation for this one - size - fits - all - regulation was to have a single set of rules for the single market. the eu ’ s primary goal of a common, single market meant that one single set of rules was preferred over differentiated sets of rules. proportionality – the principle that rules must be proportionate to the issue they address – played only a secondary role. while this makes good political sense, it has had serious side effects – as it favours large, internationally active banks over smaller institutions. particularly for credit institutions that are able to strongly optimise their employment of capital in order to benefit from higher returns, this is worth all the effort. and it ’ s worth it for especially large credit institutions because they can profit from economies of scale where fixed costs per product fall as the volume of business increases. this then also makes it easier to finance a larger compliance department. smaller, regionally based institutions, however, cannot normally rely on these economies of scale or a strong risk appetite as a source of income. seen from a single - entity perspective, the cost of regulation is similar or even higher for these banks, but their ability to take advantage of these complex strategies is somewhat weaker. in other words, the complicated risk - oriented approach favours banks with a large organisation, whose activities are more complex and which take on greater risks. the reason we should be giving this more thought is that the vast majority