initial recommendations will be released shortly for public consultation. detailed assessments of the impact of these measures on financial system resilience and economic growth will be conducted. based on these findings, the fsb will deliver a final integrated set of recommendations for approval by the g - 20 leaders at the st. petersburg summit. the ultimate goal of these reforms is to turn risky shadow banking into resilient market - based financing. the latter is an essential and valuable part of the modern financial system. getting the market to work i have spent some time today outlining an ambitious and necessary set of measures that will significantly improve the safety and the stability of the financial system. the unique nature of financial firms and the enormous costs of failure require regulation and supervision to supplement internal governance of banks and market discipline. 8 the new basel capital and liquidity rules will encourage better risk management. new fsb compensation standards will better align incentives of bankers and shareholders with the needs of the broader economy. 9 more intensive and effective supervision will reinforce internal governance and risk management. 10 but the point is not to pile up capital and other regulatory capital requirements so high that banks are never heard from again as either a source of risk or credit to the real economy. no supervisory system can catch everything. the main responsibility for identifying and managing risk rests with each firm ’ s management, whose risk managers, compliance staff and internal audit personnel will always greatly outnumber the resources available to supervisors. and since regulation alone cannot optimise risk and return, the fsb is taking steps to enhance the role of the market in achieving the right balance. by ending too - big - to - fail and thereby subjecting firms to the ultimate sanction of the market, discipline in the system will increase. in mexico, the g - 20 also endorsed the fsb ’ s new road map to end the mechanistic reliance on credit ratings. doing so will promote diverse private sector judgment, reducing cliff effects and building resilience. for a more complete discussion, see w. byres, secretary general of the basel committee on banking supervision, “ regulatory reforms – incentives matter ( can we make bankers more like pilots? ), ” a speech to the bank of portugal conference on global risk management : governance and control, lisbon, 24 october 2012. see financial stability forum, “ fsf principles for sound compensation practices, ” released on 2 april 2009, and fsb, “ principles for sound compensation practices : implementation standards, ” released on 25 september 2009

into short positions. so, at face value, price actions in one market could spill over to the other. but identifying the direction of spillover is not always easy. for example, there is evidence of a spillover from repo markets to bond markets in the us : declines in the supply of collateral, for example as a result of central bank asset purchase programmes, lead to a decline in treasury special collateral rates, which also passes through to treasury market prices. 3 interestingly, the authors find that these impacts are larger for shortterm securities. so bonds that trade special in the repo market should also trade at a premium in the cash market. but this is not what we always observe in the euro area. indeed, for the euro area it has proven difficult to establish a robust link between developments in the repo and the cash bond market. although swap spreads are the largest at the short end of the curve, bund specialness in the repo market is concentrated at the medium to long end of the curve. this is shown on slide 11. this suggests two things : first, scarcity at the front end of the bund cash market, as signalled by the wide swap spread, does not seem to have led to a rise in the specialness premium of shortdated bonds in the repo market of equal proportion. second, the specialness of medium to longterm bonds in the repo market has not translated into a similar spread widening between bunds and ois in the cash market. one way to make sense of these developments is to look at how bonds are channelled back into the ( repo ) market. for example, it could be that holders of short - term german government bonds – mainly non - euro area investors, as i mentioned earlier – are generally willing to provide them in sufficient quantity in the repo market. this might explain why short - term bunds tend to trade less “ special ”. at the same time, pspp purchases in germany have long been concentrated in medium to longterm maturities due to the restriction not to conduct purchases below the dfr. as early as april 6 / 8 bis central bankers'speeches 2015, securities purchased under the pspp have been made available for lending in a decentralised and cash - neutral manner by eurosystem central banks. 4 but i think it is fair to say that the initial restriction on lending bonds only against other securities was too penalising and is likely to have