to be of poor quality? what if the models were correct in the past, but the future is different? what if certain tail events simply cannot be modelled? these are all important considerations that we have to keep in mind when we interpret the risk figures from complex models. as it turns out, to view the model outputs as a true representation of reality has proven to be a grave mistake. furthermore, the increased reliance on banks ’ internal models has rendered the job of supervisors extraordinarily difficult. first, supervisors have to examine banks ’ exposures. second, they have to evaluate highly complex models. third, they have to gauge the quality of the data that goes into the computation of these models. to put it diplomatically, this constitutes a formidable task for outsiders with limited resources. 15 5. strengthening basel ii : introducing a leverage ratio so where does that leave us? based on what we know and understand today, i would suggest that risk - weighted capital requirements, broadly as proposed under basel ii, probably remain the most rigorous way to address banks ’ tendencies to incur excessive risks and, ultimately, to ensure adequate capital levels. however, we must address the serious short - comings of the risk - weighted approach, which have become so powerfully manifest during this crisis. what basel ii needs, therefore, is a safeguard to provide the financial system with additional protection against the negative consequences of these short - comings. i want to stress that a safeguard of this kind is needed in addition to the improvements to basel ii that are currently under way as a result of the recent fsf report to the g7 ministers and governors. 16 which brings me back to the obvious and simple response to excessive leverage : the imposition of a limit on banks ’ leverage as a complement to the risk - weighted approach reflected in the current basel framework. the regulation of banks ’ leverage is usually referred to as a “ leverage ratio ”. specifically, the idea is to set a lower limit to the capital - to - assets ratio of banks. let me stress again that this instrument is not meant to and should not replace basel ii. there is no reason to eliminate the benefits of risk - weighted capital requirements. the leverage ratio should be applied as a complement to the risk - weighted approach as reflected in the current basel framework. that means we would have two independent measures of capital adequacy. and banks would have to meet a minimum requirement for both measures. to some extent, such a capital regulatory framework

categories and currencies. for a considerable period, the snb has held not just the traditional instruments – government bonds of countries with high credit ratings – but also bonds issued by private sector borrowers and shares. holdings of shares currently make up some 10 % of foreign currency investments. in order to diversify its investments further, in 2010, the snb included additional currencies such as the australian and singapore dollars as well as the swedish krona and danish krone in its investment universe. since the first quarter of 2012, the snb has also been investing in the korean won. additional investment opportunities in the advanced and emerging economies are continually being evaluated, both for bonds and for shares, although this is subject to an adequate level of liquidity in the markets in question. bis central bankers ’ speeches the idea of a sovereign wealth fund may appear attractive at first glance. however, in the current situation, it does little to assist switzerland or swiss monetary policy. the sovereign wealth funds in norway and the oil states cannot serve as models for the management of the snb ’ s currency reserves. all of them invest state income surplus derived from commodity exports. a swiss sovereign wealth fund funded from snb foreign exchange, by contrast, would be financed through money creation. from our point of view, the three following points, in particular, speak against a sovereign wealth fund. first, the creation of such a fund would not help to enforce the minimum exchange rate. the only decisive factor is the snb ’ s willingness to buy foreign currency in unlimited quantities against swiss francs. second, all investments abroad are subject to an exchange rate risk, whether they be government bonds, shares, real estate, commodities or investments in infrastructure, and irrespective of whether they appear on the snb balance sheet or on that of a separate sovereign wealth fund. consequently, outsourcing the foreign currency investments would not reduce switzerland ’ s exchange rate risk. third, outsourcing the foreign exchange to a sovereign wealth fund would call into question the independence of monetary policy and the snb, as well as the freedom of action for monetary policy. the size and composition of the snb ’ s balance sheet are a reflection of monetary policy. the snb must also be in a position to dispose of the assets it has purchased and determine the composition of its balance sheet as required. only in this way can it conduct an independent and target - oriented monetary policy. bis central bankers ’ speeches