fail without destabilising the entire financial system. the possibility of failure is fundamental to any market economy and it must apply to banks. as the economist allen meltzer said : “ capitalism without failure is like religion without sin – it doesn ’ t work ”. only if banks see a realistic threat of failure they will have an incentive to manage risks in a prudent manner. in europe, we have recently taken some steps in the right direction. from 2016 onwards, we will have a european resolution mechanism that allows us to resolve failing banks without destabilising the financial system and without burdening the taxpayers. in my view, this single resolution mechanism has the potential to restore the balance between liability and control. thus, it will have a fundamental and positive effect on banks ’ risk culture. at the global level, the g20 recently agreed upon a proposal that requires global systemically important banks to improve their capital structure. in particular, these banks will need to ensure a minimum amount of total loss - absorbing capacity, which may be as much as 20 %, including the minimum capital requirements. this will ensure that, in case of a bank failure, it is the owner and the creditors that will have to bear the costs, not the taxpayers. this will also strengthen the incentives of banks to engage in prudent risk management. however, we have to look beyond incentives for banks. we also have to look at incentives for those who work in banks. according to the financial stability board, a crucial element of a sound risk culture is the alignment of compensation with prudent risk - taking. in the past, compensation schemes were often skewed toward rewarding short - term success without taking into account related risks. consequently, the european union has taken action and implemented new rules. according to these rules, the variable components of bank managers ’ remuneration are restricted to hellmann, t f ; murdock, k c ; stiglitz, j e ( 2000 ), liberalization, moral hazard in banking, and prudential regulation : are capital requirements enough? in the american economic review, vol 90, no 1, pp 147 – 165. bis central bankers ’ speeches 100 % of the fixed components. if shareholders agree, this can be increased to 200 %. furthermore, banks have to establish a remuneration committee and meet several new disclosure requirements on remuneration. nevertheless, we certainly have to be wary of regulatory arbitrage and unintended consequences

backdrop, one question comes to mind. if people are naturally risk - averse, then what was wrong with the banks in the run - up to the financial crisis? well, in the experiments i mentioned, it was always the people ’ s own money at stake. as soon as it is other people ’ s money at stake, things change. tversky, a ; kahneman, d ( 1992 ), advances in prospect theory : cumulative representation of uncertainty. in journal of risk and uncertainty, vol 5, no 4, pp 297 – 323. bis central bankers ’ speeches joseph stiglitz and his co - authors, for instance, find that financial crises have become more frequent since deposit insurance systems were introduced and central banks were established as the lenders of last resort. 2 from this, we can conclude that moral hazard plays an important role in the way banks deal with risk. the crisis has shown that we are faced with a situation in which “ heads, the bank wins ; tails, the taxpayers lose ”. liability and control are off - kilter and this reduces banks ’ incentives to manage risks prudently – hence their will to see in the dark is diminished. thus, if we want to make banks care about risks, we have to restore the balance between liability and control. here, the most prominent example is the “ too big to fail ” problem. a fundamental lesson learned from the financial crisis is that the failure of very large or interconnected banks can destabilise the entire financial system. just think of 15 september 2008, when the collapse of lehman brothers triggered the global financial crisis. banks that are too big to fail are in a situation that is comfortable for them, but uncomfortable for society. why is that? these banks benefit from an implicit insurance policy at no cost to themselves. they know that whenever they get into trouble, the government is likely to step in and bail them out in order to prevent a systemic meltdown. there is no doubt that this implicit insurance policy creates all the wrong incentives. if a bank can rely on state support when it gets into difficulties, it will no longer see risk and return as two sides of the same coin. profits from risky business remain with the bank, while the taxpayer is left to bear any potential losses. thus, to promote a sound risk culture within banks, we have to mitigate the “ too big to fail ” problem. in order to achieve this objective, we need mechanisms that allow even large banks to