safely and soundly, the united states has developed an extensive system of banking supervision and regulation. in effect, regulators assumed the role of monitor, the role that insured depositors no longer have any incentive to play. somewhat ironically, however, this system of government supervision may itself exacerbate moral hazard if the banks ’ uninsured creditors assume that the government ’ s oversight obviates any need for them to monitor banks. market discipline may erode further if market participants believe that, to avoid the risk of a financial crisis, the government will step in to prevent the failure of any very large institution – the “ too big to fail ” problem. with little or no help from market forces, the burden of ensuring banks ’ soundness falls entirely on the supervisory agencies. but as we saw in the savings and loans crisis of the 1980s, regulatory oversight may also fail if the regulators are not sufficiently vigilant or lack the political will or financial resources to promptly close insolvent institutions. the lesson of history appears to be that neither market discipline nor regulatory oversight alone is completely adequate for keeping the banking system safe and sound. however, regulators have increasingly come to appreciate the value of a hybrid system that supplements direct regulation with a federal reserve act, december 23, 1913. substantial amount of market discipline. fortunately, regulators have a variety of ways to restore and strengthen market discipline for banks, notwithstanding the existence of the federal safety net. minimum capital requirements are one method. a bank ’ s capital provides a buffer that can absorb losses before they fall on the deposit insurance fund ( and, ultimately, the taxpayers ). in addition, however, capital requirements enhance market discipline ; they do so by ensuring that the bank will have shareholders ( and possibly other types of creditors as well ) who have a significant amount of money at risk. these shareholders have a substantial financial incentive to monitor the bank ’ s activities and to insist on changes if they are dissatisfied. bank managers are also quite aware that a low share price could invite a hostile takeover, an outcome they usually want to avoid. the incentives for a bank to control risk are even stronger if regulations link the amount of regulatory capital to the risks taken by banks. ( tying capital requirements to risk is a primary objective of the basel ii capital accord, currently in the process of review and implementation. ) risk - based capital regulations, if properly designed, require banks that take more risks to hold more capital. because equity capital is the most expensive form of funding

past regularities. but surveys of both firms and banks indicate that financing costs related to non - interest terms and conditions – such as charges and fees or collateral requirements – have been tightened. credit aggregates have slowed down significantly over recent months. in september lending to the private sector was 0. 3 % lower than a year earlier. this was the first negative number since the start of monetary union. in analysing these credit aggregates, we have to keep in mind the interaction between supply and demand. it is always difficult to disentangle two sides. there are several reasons for expecting loan demand to be weak now. as production has declined considerably over the past year, firms may have delayed or cancelled investment projects, and thus reduced their demand for new loans. similarly, households may think twice about major purchases as job prospects have become more uncertain. compared with past downturns, the recent developments in credit flows seem to be in line with historical regularities. in the past, the pick - up in loans to non - financial corporations has lagged the turning points in economic activity by about three quarters. this means that we should expect lending to non - financial corporations to remain relatively subdued for some time. the annual growth rate of loans to non - financial corporations was - 0. 1 % in september. lending to households, which tends to move more in line with the turning points in economic activity, was 0. 3 % lower in september than a year earlier. the monthly loan flows to households have however been positive and increasing since may this year. overall, the significant slowdown in lending experienced so far can to a large extent be attributed to weak demand, as surveys both of banks and firms have shown. one example is the recent survey on small and medium sized enterprises ’ ( smes ) access to finance, conducted in co - operation between the ecb and the european commission. according to the survey, three out of five smes that had applied for a bank loan in the first half of 2009 received the requested amount in full. around one in five received the requested amount in part. only about one in ten had the loan application rejected. however, some supply - side constraints seem to have played a role. banks have tightened credit standards substantially over the past year. the quarterly survey of banks indicates that the number of banks tightening credit standards has declined, but remains positive. banks have reported that their liquidity position has helped to ease credit constraints very recently. while private - sector demand for