output. 3 governments and central banks took unprecedented action globally in response to the perils originating from the financial market turmoil. euro area governments, for instance, increased their deficits on average by more than 5 percentage points of gdp in 2010. this was a joint consequence of rescue packages for financial institutions, cyclical stimulus packages and operations of automatic stabilizers. in 2010, ireland recorded a deficit of over 30 percent, resulting from a one - off support for its banking sector. debt - to - gdp ratios in advanced economies have increased on average by about 25 percentage points since 2007. central banks around the world expanded their balance sheets, though to different extents and with different asset - liability structures. it is clear that in our democracies, such measures taken by fiscal and monetary authorities can only be an exception. they are not at all repeatable, neither in nature nor in scale. the disasters that we witnessed in the financial system must not repeat themselves. it all leads to one conclusion : reforms are urgent! the basel iii framework means some progress on the way towards a more sound and resilient financial system and in my view it is at the core of financial regulation. nonetheless, to complete the g20 action plan, further policy actions need to be taken. let me just highlight three initiatives that i consider as key elements of the new regulatory framework : ( i ) the regulation of credit rating agencies, ( ii ) the regulation of the shadow banking system, including hedge funds, and ( iii ) the establishment of effective bank resolution regimes. concerning credit rating agencies, the fsb published in october 2010 a set of principles that aim at reducing reliance on external credit ratings. international standard setters and national authorities now have to translate these principles into specific policy actions. however, the work in this field remains at an early stage, and the progress has to be accelerated significantly in several jurisdictions. but let me also mention that important steps have already been taken in this field. for example, the dodd - frank act in the us requires authorities to remove all references to or requirements for credit ratings from regulations. an important challenge for authorities, however, is to develop alternative standards that could reliably indicate the creditworthiness of borrowers. see oecd ( 2010 ), “ economic policy reforms – going for growth ”, part 1. bis central bankers ’ speeches concerning the regulation of the shadow banking sector, it is important to close the gaps between strengthened banking regulation and the non - regulated entities.

##metric shocks, there was no compensation by other countries. it is a problem that is quite difficult to solve, but it is a fact that emu hasn ’ t functioned very well in this respect. one worry is that the fundamental reflection about how to make emu work better is not advancing sufficiently. not all is negative, of course. we have managed to set up better mechanisms to deal with sovereign debt crises, but you are still in an unclear position when dealing with issues of sovereign debt. and we have banking union, we are especially advanced in terms of supervision, but we have not finished it. the fact that banking union is not finished, doesn ’ t that lead to small banks in small countries being bought by big banks from big countries? i know this is a big discussion here in portugal. i always have problems in understanding why that would be a problem. i experienced the crisis in belgium with fortis, and that bank represented a huge risk for that country. now, it is part of bnp and this has been absolutely instrumental in avoiding a catastrophe. for europe, this is an important question. you see the banking systems are in general more national than they were. not in portugal, but in many countries. the banks, even when they have subsidiaries, are tending to manage by way of separate entities more and more. banks today are exposed to country risk because most of the assets are related to the country. this means that, if you have a shock in the country, the banking system is not diversified enough. of course, the fact that we are in a monetary union limits the room for manoeuvre : you don ’ t have the exchange rate instrument, you have a single monetary policy. so it is absolutely vital to evolve towards pan - european banks, banks that are geographically diversified and also that would be backstopped by emu as a whole. so what you are saying is that, in a monetary union, if small countries want to have safe banks, they have to forget the ownership question? i think what matters in banks is good governance, not national ownership. you can always have local banks, that ’ s not the problem, but having the whole banking system exposed to the local economy in a monetary union like ours is a dangerous combination. we have two problems in the euro area : a fragmented banking market and the lack of common backstop. it cannot be done in one day, but you have to spell out how you make the transition to it