##able as the financial system itself – this is the first principle on my list. it is now widely accepted that innovations rarely make the financial system simpler and usually make it more complex. the key financial innovation in the ancient phoenician civilisation was the forward transaction – a financial instrument that every student of financial economics is familiar with today. since then, financial innovations have become increasingly complex – to the point where the instruments used today are often understood by only a handful of experts. but does that mean that we need increasingly complex regulation, too? or could it be that we need only a few simple rules to ensure effective supervision and safeguard financial stability? one current example of this debate concerning simple and complex regulation is the leverage ratio. the advocates of a simple leverage ratio for banks want to replace the current risk - based capital rules with a “ blanket ” capital requirement. they believe that the same percentage of capital should be held against all assets, regardless of their risk. i have to bis central bankers ’ speeches admit that the idea appears appealingly simple at first sight. and it would avoid the mistakes and manipulation that can arise during the complex process of calculating risk weights. yet a leverage ratio would also create the wrong incentives. if banks had to hold the same percentage of capital against all assets, any institution wanting to maximise its profits would probably invest in high - risk assets, as they produce particularly high returns. this would eradicate the corrective influence of capital cover in reducing risk. weighing up the advantages and disadvantages of simple and complex regulation, it is probably better in this instance to use risk weightings in combination with the leverage ratio – which is precisely what the new rules envisage. consequently, the second principle of good regulation is that regulation must be as simple as possible and as complex as necessary. yet sometimes a certain set of circumstances can make regulation needlessly complex. one example of this is again the leverage ratio. the calculation of this ratio, which is essentially quite simple, is complicated by the fact that accounting standards vary from country to country. intricate conversion calculations are needed to make leverage ratios based on us accounting principles comparable to those based on the standards used in europe. if accounting standards were harmonised at a global level, the applicable regulation would be simpler. however, the more complex the regulation, the more important it is to adhere to the third principle on my list : coherence. i believe that regulation must be coherent on at least three levels. first, regulation

to create a framework that gives supervisors the ability to act. they must be able to resolve or restructure a failing bank – however large, interconnected or significant it may be. over the past few years we have made some progress toward this objective. in europe, a resolution mechanism for banks will be in place from the beginning of 2016. however, we also have to address the “ too big to fail ” problem at the global level. we have taken some small steps towards this goal but we still have a big leap ahead of us. i therefore consider the “ too big to fail ” problem largely unresolved. but let ’ s return to the issue of good banking supervision. good supervisors need both the will and the ability to act. my example illustrates how the ability to act depends on the regulatory framework. but there is more. both the will and the ability to act also depend on the institutional set - up of banking supervision. vinals, j. et al. ( 2010 ), the making of good regulation : learning to say “ no ”, imf staff position note, spn / 10 / 08. washington, dc. bis central bankers ’ speeches and in this area, europe is on the eve of a major change. one month from now, banking supervision in europe will be transferred from the national to the european level. on 4 november, the ecb will take on the direct supervision of the largest 120 banks in the euro area. these banks account for more than 80 % of the aggregated balance sheet for the euroarea banking sector. this will make the ecb one of the world ’ s largest supervisors. european - level supervision is the most important step towards financial market integration in the euro area since the launch of our single currency. it is a logical step, too, since a single monetary policy also requires integrated financial markets – which includes, without doubt, european - level supervision. european banking supervision will allow banks throughout the euro area to be supervised according to the same high standards. in addition, cross - border effects can be covered better through joint supervision than by national supervisors. and adding a european perspective to the national view will put more distance between the supervisory authority and the entities it supervises. this will minimise the danger of supervisors getting all - too - close to their banks and thus treating them with “ kid gloves ” out of national interest. european banking supervision will thus enhance the effectiveness of banking supervision. and, together with the european resolution mechanism