encourage regulatory arbitrage and thus tend to heighten systemic vulnerability. therefore, the bundesbank is very much involved in the work of the fsb. i would like to restrict myself to highlighting just two aspects which enjoy a very broad consensus in the international debate. first, there is consensus on one of the points mentioned earlier, namely the need to strengthen financial institutions ’ resilience ; the capital and liquidity buffers for weathering crises have to be increased. more robust capital and liquidity requirements as well as an improved measurement of exposures to risks are also necessary so that risks arising from excessive leverage can be better controlled in the future. due account should be taken when devising and implementing rules of the particularities and peculiarities of national financial systems. this is especially important with regard to the aspired improvement in the quality of banks ’ capital base. here it is essential to focus on the targeted function – the ability to absorb losses – rather than on legal form. in view of the ongoing difficult economic environment, it is also evident that appropriate transition periods have to be granted. overhasty implementation would pave the way for a likely capital - induced credit supply failure. second, we must ensure that the incentive structures of participants in the financial system are aligned with the objective of fostering a sustainable development. this will be facilitated by enhanced transparency, which strengthens market discipline, even though it is obviously not sufficient on its own. this applies especially to the securitisation process. significantly improved standards of quality and integrity are a key precondition for reviving the securitisation market. originators should have a direct interest in ensuring that all risks ( including those of correlated defaults ) are captured adequately – for instance by retaining a vertical slice of securitisations. provided the instruments are designed in a way which makes microeconomic risk - taking compatible with sound macroeconomic outcomes, they can play an effective role as a source of funding for the banking sector. they will thereby also contribute to reliable and properly priced lending to enterprises – which is the most important aspect from an economic perspective. in a nutshell, the internationally coordinated reforms should substantially increase the stability of the financial system. on balance, they will probably imply more moderate earnings prospects in the financial sector. however, earnings are also likely to be less volatile and therefore more robust. given the considerable negative externalities that may arise if financial institutions run into distress, that seems a price worth paying to safeguard financial stability

fail ”. second, europe ’ s banks have substantially increased their investments in sovereign bonds. over the last few years they have invested increasingly in bonds of their home governments and their home regions. the links between bank risks and sovereign risks have become much stronger, not looser, in recent years. nonetheless, the reasons for this development are more nuanced than simply the outright public ownership of banks. in any case, it is critical from a financial stability perspective, especially for those countries hit by the european debt crisis, and indirectly for the entire financial system. bis central bankers ’ speeches so the links between the state and the banks, between the public and the financial sector have become a challenge for financial stability – despite the fact that they are partly a result of measures needed to ensure financial stability. in his book “ our wealth and its enemies ”, the german journalist gabor steingart describes the blurring of lines between banks and the state as follows : “ precisely in the centre [ … ] of our market economy a mutation took place. the close connection between risk - taking and responsibility, a constitutive element of the market economy, was decoupled [ … ]. an economic hybrid came into the world, which skipped over the border between the state and the private economy. ” journalists are, of course, entitled to use a more controversial tone, but in my view there is some truth in this argument. blurring the lines between the state and banks risks deforming our market economy and our thinking about it. sometimes it seems as if we are witnessing a transformation of values and a redefinition of fundamental concepts. the close connection between risk - taking and liability, which is an important element of a market economy, has weakened. conservative and risk - averse business models have become somewhat old - fashioned. if the state is bearing a significant part of the losses in the case of a default of a bank, banks are encouraged to take on more risks. high capital buffers which were originally viewed as a sign of a sound bank became an obstacle for maximising the return on equity. and those banks that nonetheless followed a sustainable strategy ran the risk of being punished by the markets. long termism has been increasingly replaced by short termism. bonuses are another example of transformation and redefinition. in the past, bonuses were seen as additional income for those working better and harder. nowadays, they are generally regarded suspiciously as an instrument of inappropriate enrichment. i believe that