a bank to ignore the cost of capital in managing its business, just as it would be irresponsible for a bank to ignore market preferences and forces when choosing its lines of business. increases to the cost of capital do not simply evaporate on a bank ’ s balance sheet, they are passed through to customers in various ways, including in the form of higher costs for financial services or in reduced availability of services available in the market. the cost of bank capital also influences where activities occur, either within the regulatory perimeter of the banking system or in non - bank entities and the broader shadowbanking system. when the cost of a bank engaging in an activity exceeds the cost of performing the same activity in a non - bank, that cost differential creates pressure that over time leads to a shift in these activities to non - bank providers. where does that leave us? achieving good policy requires acknowledging and balancing the benefits and costs of capital requirements, since it is one of the most important inputs policymakers can use to enhance the safety and efficiency of the banking system. relying simply on the “ more is better ” approach downplays or ignores these critically important tradeoffs. when policymakers consider changes to the capital framework, particularly increases of the magnitude contemplated in the proposal, we must carefully weigh the benefit of increased - 4safety from higher capital levels, with the direct costs to banks, and the downstream effects on consumers, businesses, and the broader economy. we must also consider the broader regulatory landscape and how changes to capital regulations may complement, overlap, or conflict with other regulatory requirements. and importantly, we must consider the broader implications for the structure of the u. s. financial system and for financial stability. while these considerations may caution us against capital increases of the magnitude contemplated in the proposal, i do see a potential path forward for capital reform. the path forward as i consider next steps, i am cautiously optimistic that policymakers can work toward a reasonable compromise, one that addresses two of the most critical shortcomings of the proposal : over - calibration and the lack of regulatory tailoring. public feedback has also assisted in identifying the aspects of the proposal that result in the most severe unintended consequences. in my mind, it will be necessary for policymakers to modify the proposal to mitigate these issues and concerns as we move forward. calibration first, i would like to address calibration. the costs of this proposal, if implemented in its current form,

business model. the period ahead is likely to provide a first material test of changing banking business models and the increased reliance on secured funding. although currently profitable and well capitalised, many banks will experience income and credit losses, which may trigger a re assessment by some of them of the suitability of the so - called originate - and - distribute business model. the current episode has also shown that the transfer of credit risk outside the banking sector may ultimately not be effective. this is related with reputational and other concerns, which induce banks to take credit risk back onto their balance sheets. sixth, with respect to our own crisis mitigation tools, a lesson that we can draw at this stage is that the operational framework of the eurosystem has proved able to cope with stressed market conditions. so far, the eurosystem has been able to manage the turmoil in an effective and flexible manner. two ingredients of its operational framework have been particularly important : the first is the clear separation between on one hand the ecb ’ s management of the aggregate liquidity conditions and on the other hand the setting of its monetary policy stance, which is signalled by the minimum bid rate in main refinancing operations. this separation has been extremely valuable under present circumstances. looking ahead, and in line with its previous communications and actions, the ecb will continue to steer very short term interbank rates close the minimum bid rate. the second ingredient is the eurosystem ’ s collateral framework. the broad list of eligible assets has ensured that a broad range of counterparties could access the credit operations of the eurosystem during the turmoil. this has helped counterparties to effectively mitigate funding liquidity risk when interbank markets stopped functioning properly. as a side effect, the acceptance of abs in the sizeable refinancing operations has allowed to address also asset refinancing needs of counterparties effectively. this has certainly contributed to a better functioning of the money market since counterparties know that they can turn to the eurosystem to refinance these assets. and finally the ongoing process of significant market correction which we experience since august should trigger a very deep and candid review in all the areas which have a substantial influence on the functioning of the global financial markets. this review process should concentrate on what could be done to promote financial stability and to diminish to the maximum extent possible the elements of procyclicality that may be inbuilt in a large number of fields.