guy quaden : basel iii and beyond speech by mr guy quaden, governor of the national bank of belgium, at the eurofi financial forum, brussels, 28 september 2010. * * * ladies and gentlemen, i am very pleased to have the opportunity to participate in the brussels eurofi conference and to share some thoughts with you at this opening session. it is now just about 3 years after the us subprime crisis triggered world - wide financial turbulence and 2 years after the collapse of lehman brothers dramatically escalated the crisis. the crisis has seriously dented belief in the ability of the markets to regulate themselves. there are currently a lot of items on the agenda of international fora waiting to be dealt with. the financial stability board at the g20 level as well as ecofin at the eu level have drawn up detailed roadmaps to pave the way for extensive reforms. the crisis has indeed given rise to a unique momentum for profound reforms of the financial system. we should not let this momentum slip away. unfortunately the general public sometimes gets that impression. of course many complicated technical issues have had to be resolved. and i admit that it will be important to introduce the new regulations in a timely manner so as not to hamper the smooth flow of credit which will be required to support the nascent recovery. in fact, while there is much discussion as to the design of the exit strategy from the public support measures, in the monetary and financial fields, we should be equally aware of the need for an entry strategy for moving over to more comprehensive regulatory requirements. from this point of view the recent proposal coming from basel represents a very important contribution. two weeks ago, the group of governors and heads of supervision, the oversight body of the basel committee on banking supervision, endorsed a broad proposal to strengthen the quality and quantity of regulatory capital held by banks and to institute a global liquidity standard. this proposal, the heart of the new basel iii framework, will be submitted to the approval of the leaders of the g20 countries at their november summit in seoul. the proposal represents a major reform of banking regulations, which should substantially improve the resilience of banks to stress conditions, thus reinforcing financial stability and reducing the occurrence of a new crisis with injection of public money. key elements include not only an increase in the minimum regulatory capital requirement but also an increase in the amount of capital that must be held in the form of common equity, which offers the greatest capacity for loss absorption. i will

by sft matched books. among the first set of options, the idea that seems most promising is to tie capital and liquidity standards together by requiring higher levels of capital for large firms that substantially rely on short - term wholesale funding. the additional capital requirement would be calculated by reference to a definition of short - term wholesale funding, such as total liabilities minus regulatory capital, insured deposits, and obligations with a remaining maturity of greater than a specified term. there might be a kind of weighting system to take account of the specific risk characteristics of different forms of funding. the capital requirement would then be added to the tier 1 common equity requirement already mandated by the minimum capital, capital conservation buffer, and globally systemic bank surcharge standards. however, this component of the tier 1 common equity requirement would be calculated by reference to the liability side, rather than the asset side, of the firm's balance sheet. the rationale behind this policy option is that, while solid requirements are needed for both capital and liquidity, the relationship between the two also matters. for example, a firm with little reliance on short - term funding is less susceptible to runs and, thus, to the need for engaging in fire sales that can depress capital levels. a capital surcharge based on shortterm wholesale funding usage would add an incentive to use more stable funding and, where a firm concluded that higher levels of such funding were nonetheless economically sensible, the surcharge would increase the loss absorbency of the firm. such a requirement would be consistent with, though distinct from, the long - term debt requirement that the federal reserve board will be proposing to enhance prospects for resolving large firms without taxpayer assistance. the second kind of policy option is to address head - on the macroprudential concerns arising from large matched books of securities financing transactions. a capital surcharge is in some respects an indirect response to the problem of short - term wholesale funding runs and, as earlier noted, current versions of capital and liquidity standards do not deal with matched bis central bankers ’ speeches book issues. one might choose either to increase capital charges applicable to sft assets or to modify liquidity standards so as to require firms with large amounts of these assets to hold larger liquidity buffers or to maintain more stable funding structures. it is not clear how much appetite there may be internationally for revisiting agreements that have been completed, such as the lcr and the basel iii capital rules. however, with the