and up to the present day : first, to strengthen the stability of the international banking system, and, second, to eliminate or mitigate distortions in international competition among banks due to differences in national regulation. undoubtedly, the main achievements of the first basel capital accord were that it represented a significant step towards international harmonisation of banking regulation – it was later applied by more than 100 countries – and that, for the first time, it put the focus on the relationship between the capital that banks hold and the weighted risks that banks take. after its implementation, it was not long before basel i came in for increasing criticism. first, it did not adequately cover all the risks to which banks were exposed. second, the risk weightings were presented in a very crude form that was an inadequate reflection of the actual underlying risks. despite such early warning signs, it was a long road that led to the implementation of basel ii. in the interim, financial turbulence, namely the mexican crisis ( 1994 - 95 ) and the asian crisis ( 1997 - 98 ) had further heightened the awareness among the g10 countries of the need for greater international cooperation in financial market oversight. as a consequence, the financial stability forum was founded in 1999 and the first working groups were entrusted with drawing up appropriate measures for financial regulation. out of this process the basel ii framework with its three pillars that you are all aware of was born and finally published in june 2004. basel ii was scheduled for implementation by end of 2006. however, owing to its complexity – especially with regard to the different approaches to assessing the minimum capital requirements – the timetable allowed fairly long transition periods for the change of supervisory regime. as a result, basel ii had not yet been fully implemented by most credit institutions when the subprime crisis emerged in the summer of 2007. in particular, many banks – including the eu ones – applied the new basel ii capital rules for the first time in 2008. consequently, we still have only a restricted knowledge, based on real data, of how basel ii works in practice. and, most notably, we cannot blame basel ii for the recent financial crisis. nevertheless, the financial crisis has highlighted deficiencies in financial regulation within and beyond the supervisory framework of basel ii that have to be addressed based on a thorough analysis. challenges in strengthening financial stability 3. 1 banking regulation the search for the underlying causes of the financial crisis has been intense. although a definitive assessment is still outstanding, it is widely agreed that the seeds of the crisis were

, and the european commission among others – is a step into the right direction. however, the esrb will contribute effectively to systemic risk control only if an unpoliticised open analysis and discussion is ensured. therefore, central banks should have sufficient representation on this board and be given adequate weight. there are two more arguments why central banks should play a key role in banking supervision. first, the interdependence of monetary policy and the financial system means that central banks have a strong and natural interest in financial stability. second, central banks in most countries are strongly involved in banking supervision and can therefore bring their expertise to bear in this field. having said that, i do not want to skim over the fact that central banks, too, have their own lessons to draw from the financial crisis. one of the lessons which certainly has to be learned is that the stability of the financial system is an essential condition in its own right which has to be taken into account in the conduct of monetary policy. in this context, the paper borio and zhu presented at this conference points to a very important link between monetary policy and the perception of risk by economic agents – something which has, so far, been neglected. although more research is undoubtedly needed before we can speak of risktaking as a new channel in the monetary policy transmission process, major lessons for monetary policy can be drawn from the findings of this paper. in particular, the conclusions support the call for a more symmetric monetary policy that tries to look through the financial cycle in stabilising monetary policy. conclusion ladies and gentlemen safeguarding financial stability has been the paramount objective of banking regulation. unfortunately, it has usually been only the painful experience of financial crisis which has been a catalyst for implementing the necessary regulatory changes. from history and not least from the current financial crisis we should learn that banking regulation is exposed to permanent change, and so the debate on the future of banking regulation must and will go on. thank you very much for your attention.