than in other jurisdictions in which the systemic banks are less relevant. however, even if the probability of a systemic crisis occurring is lower, this does not guarantee that its intensity diminishes, and this buffer was not designed to be released in these circumstances. in addition, as this buffer is demanded on all exposures, nothing guarantees that its release will affect the provision of credit in a specific jurisdiction. the other instrument in the macroprudential policy - maker ’ s toolkit to address non - cyclical risks is the systemic risk buffer. here, we welcome the european initiative to allow its application to sectoral credit portfolios, thus providing it with more flexibility. finally, let me also stress that, for the moment, the bulk of macroprudential tools affect banks exclusively. while banks continue to account for most financial intermediation, they are losing relevance and could do so even more in the future. this can give rise to regulatory arbitrage and undermine the effectiveness of macroprudential tools. the spanish case is to some extent innovative5, as similar borrower - based tools to those granted to the banco de espana were given to the financial markets authority ( cnmv ) and the insurance supervisor for their own sectors. thus, one of the tests for the spanish macroprudential institutional setting will be whether it is able to achieve enough coordination across authorities to maximise the effectiveness of the macroprudential toolkit. in any event, we should bear in mind that global financial integration can also have similar effects to the domestic development of the non - bank financial sector, with banking and non - banking entities operating in different jurisdictions. especially in this last area, major steps have been taken ( with reciprocity agreements ) ; but there is still ample room for improvement. i am sure we will be able to address these challenges in future editions of this conference. let me now conclude by stressing that, in this context in which a homogenous framework and experience in the use of macroprudential tools is lacking, having for international attempts to follow a cross - sectoral approach on residential mortgage underwriting see, however, the fsb principles for sound residential mortgage underwriting practices ( april 2012 ), the fsb thematic review of mortgage underwriting and origination practices ( march 2011 ) and the joint forum review of the differentiated nature and scope of financial regulation – chapter 3 on mortgage origination – ( january 2010 ). 10 / 11 adequate communication is

did not directly compete with one another. government regulation mirrored and reinforced this segmentation. with financial innovation came new levels of competition, which then caused pressure for government to change the rules of play. as a result, the legal strictures preventing banks from engaging in certain businesses are being loosened. banks are increasingly in direct competition with securities firms and insurance companies. new technology and financial innovation have clearly affected the way in which many firms manage their business. they have also put stress on many aspects of traditional legal, regulatory, and accounting frameworks. over the past decade bank supervisors have learned some important lessons in this regard. these lessons propel our efforts to adapt supervisory and regulatory regimes to better accommodate the changes under way in the financial services sector - - to move to a new supervisory paradigm. today, i would like to briefly summarize some of these lessons, illustrate how they are shaping the evolution of bank supervision, and some thoughts of how they may affect international supervision, as well. lessons learned by bank supervisors perhaps the most basic lesson we have learned from our experience in supervising trading and derivatives activities is that the underlying risk of a financial instrument is more important than what an instrument is called. although two instruments that differ in name only may have entirely different treatment under existing ( and outmoded ) legal and regulatory frameworks, the market, credit, liquidity, operational, and reputational risks embodied in them can be identical. to be sure, financial engineering can create derivative instruments that combine risks in complex ways. but, upon analysis, traditional cash instruments that appear simple may have greater risk than the complex instruments that are labelled “ derivative. ” indeed, placing financial instruments in pigeonholes without regard to their true risks and economic functions can create disincentives for prudent risk management - - often with unfortunate results. the structured note phenomenon of 1993 and 1994 is an important example. many institutions shunned “ derivatives ” in favor of these seemingly low - risk securities issued by federal agencies, only to find out later that these instruments had significant price volatility from embedded options. the reaction of many was to label structured notes as derivatives as well, rather than understanding that it was the underlying risk characteristics that had been poorly managed. in its supervisory role, the federal reserve is increasingly emphasizing the need for managing the risks of banking and de - emphasizing a focus on specific instruments. for example, in 1993 we issued examiner guidance on trading and dealer activities. this guidance covered a large spectrum of financial