, depending on whether the levy is imposed ex - post or ex - ante. for instance, the proceeds raised by a levy can be destined to finance a dedicated fund to be activated in the future for the orderly winding down of distressed banks. the eu commission is moving forward in this area, with the aim of establishing a common framework for a levy in the eu member states. the imf is also finalising a report on this topic for the g20 summit later this month in toronto. in my view the discussion should be properly framed in the overall reform of the prudential framework, including the quantitative impact assessment of the various initiatives i mentioned earlier. such a careful assessment is warranted, inter alia, to avoid imposing an undue burden on the banking sector and, ultimately, hamper the flow of credit to the real economy. another important element of the basel reform package is the introduction of a range of measures designed to mitigate the inherent pro - cyclicality of the financial system. in this context, mechanisms that enhance prudent and forward - looking provisioning of banks as well as the building up of sufficient capital buffers in years of economic expansion that can be drawn down at times of stress, are all under consideration. overall, these measures aim at ensuring that the financial system functions as an absorber, rather than an amplifier of shocks, thus smoothing the volatility of the financial and real economic cycles. in setting up a more forward - looking provisioning framework, the basel committee works closely together with the accounting standard setters with a view to developing a sound operational framework for expected loss provisioning. in this context, let me mention as very important the collaborative efforts under way between the basel committee and the iasb to develop a revised expected loss model that proves operational. concerning measures on capital buffers, the basel committee set forth a proposal on a capital conservation buffer that would establish certain restrictions for undercapitalised banks with regard to the distribution of earnings in the form of dividends, share buy backs and bonuses. in addition, the introduction of a counter - cyclical buffering mechanism is also considered. it would require banks to build up additional capital buffers when excessive credit growth is identified in the economy. the last topic i want to pay some attention to is the role of central banks in financial stability. the experience of the financial crisis was not only an important trigger to set in motion supervisory and regulatory reform. it also drew attention to the need to develop

jose manuel gonzalez - paramo : reform of the architecture of the financial system speech by mr jose manuel gonzalez - paramo, member of the executive board of the european central bank, at the universidad del pais vasco, campus de leioa, bilbao, 21 june 2010. * * * i am very grateful to frank dierick for his contributions to this speech and to ines cabral and balazs zsamboki for inputs. ladies and gentlemen, i. introduction it is a pleasure to be in the city of bilbao, which hosts one of the finest modern art museums in spain and europe : the guggenheim museum. with its very distinct architecture, this museum is the city ’ s world - famous hallmark. much as i love the design of the building, however, i will talk today about another type of architecture, namely that of the financial system. and just like the guggenheim building, the current reforms of the financial system stir a lot of emotions. we are dealing here with a very broad topic but i will approach it like a tourist visiting the guggenheim museum. i will start by giving you a broad overview, describing the landscape as it were. i will briefly review the causes of the financial crisis and will run through the main initiatives that are on the plate of policy makers to prevent a crisis of such magnitude and severity ever recurring again. then i will turn to four eye - catching initiatives : first, the establishment of the european systemic risk board or esrb, a new body that will for the first time become responsible for macro - prudential supervision in the eu ; second, how policy makers are dealing with systemically important institutions ; third, the issue of procyclicality or the dynamic interplay between the financial sector and the real economy ; fourth and last topic to which i will pay some more attention is the mandate of central banks in the area of financial stability. let us now embark on our architectural walk! ii. causes of the current crisis much has been said about the root causes of the current crisis over the past three years. i will not expand on this topic but i will just mention specific factors – some of them of a macroand others of a micro - economic nature – which in my view were key in the run up to the crisis. in the two or three years before the crisis erupted, a constellation of factors, including very favourable macro - financial conditions combined with strong growth, low inflation, ample liquidity, exceptionally low volatility across virtually