, in “ peripheral ” euro - zone countries, on which markets are now focusing, financial crises and population ageing have been taking place almost simultaneously ( chart 11 ). we should all be aware that, as a consequence, most of the new regulatory frameworks are to be introduced not in “ a normal time after crisis ” as expected, but in a stressed time. 3. 2. implementation of regulatory reform : crisis prevention versus crisis response finding ourselves in such a difficult economic and financial environment, we should bear in mind that the best “ prevention ” may not be the best “ response ” to a crisis. although public bis central bankers ’ speeches capital injections into banks or blanket guarantees of deposits might give rise to moral hazard, these measures are sometimes necessary in order to contain immediate spillover. similarly, increasing capital buffers may contribute to maintaining a bank ’ s solvency over the medium term, but increasing banks ’ capital burden in a stressful time might create an adverse feedback loop of intensified capital constraints, weak bank lending and economic slowdown, thus accelerating the bank deleveraging that could lead to a devastating credit crunch. although we are intellectually tempted to consider what policy tools are available to help promote financial stability, it is practically more important to consider when to use these tools. particularly, inappropriate sequencing of policy measures might intensify the risk of adverse feedback loops in stressed times, even though individual measures could be effective in normal times. moreover, we should be extremely careful to avoid miscommunication through the inappropriate timing of policy announcements, especially when we introduce crisis prevention measures in an environment where emergency responses to the on - going crisis are still crucial. in view of the on - going eurozone crisis, we have to monitor carefully how european banks react to the new regulatory environment in which tighter capital regulations are expected. needless to say, after the substantial leveraging of european banks before the crisis as i explained, orderly and gradual deleveraging should be viewed as the “ intended ” consequences of tighter regulation. nonetheless, in order to evaluate the impact of the eurozone problem on the global economy, it is necessary to assess whether and to what extent european banks intensify their deleveraging overseas, given the various pressures they face within their home jurisdictions. i believe such assessment is what “ macroprudence ” is required to do. 3. 3. the volcker rule and unintended cross - border impacts we are now tackling the difficult issue of implementing new regulations

s. treasuries in particular ( chart 9 ). this extraordinary expansion of european investment in risk assets is often argued as being at least partly responsible for the formation of the u. s. credit bubble. this is clearly an unintended effect of the 2004 regulatory changes. this excessive risk taking of european financial institutions in the u. s. markets led to their “ triple ” vulnerability to economic shocks. the first vulnerability is a sizable exposure to legacy assets. a large portion of lower - quality assets such as those related to subprime loans were held by european financial institutions, and even today these institutions face the challenge of dealing with these legacy assets. the second vulnerability is their heavy reliance on wholesale dollar funding. a distinctive feature of european financial institutions has been their relatively high loan - to - deposit ratio, compared with their japanese and u. s. counterparts. consequently, in expanding their balance sheets, european financial institutions have become increasingly reliant on marketfunded liquidity. looking at the funding structure of french financial institutions, for example, the ratio of funding other than deposits by residents has been rising noticeably since 2004 ( chart 10 ). this caused a significant problem when u. s. institutional investors such as money market funds became increasingly nervous about counterparty risk in the eurozone. the third vulnerability is sovereign risk. the eurozone has many sovereigns within one currency area. it becomes increasingly difficult to treat all sovereigns equally in their risk weights once market participants recognize individual debts as being different in their creditworthiness. it should be noted that, although the u. s. and other countries ’ institutions share the first vulnerability, the second and third are unique to the eurozone. when their holding companies were placed under the umbrella of the securities and exchange commission in 2004, u. s. investment banks were exempted from the standard sec net capital rule. bis central bankers ’ speeches 3. looking forward : what should we learn from this episode? 3. 1. this time may truly be different : severe balance sheet adjustment under unfavorable conditions now, i would like to examine what we should learn from the current eurozone crisis in terms of financial regulation, and examine the current issues of regulatory reform from this perspective. global regulatory reform since the lehman crisis of 2008 has clearly been focused on the “ prevention ” of another crisis. several advanced economies are to introduce new regulatory frameworks for the purpose of preventing financial institutions ’ excessive risk - taking. a typical example is