mispricing of risk relates to deficiencies in risk management techniques, but also, and perhaps more importantly, to existing incentives in the banking system oriented towards the short term profitability of banks. diversification in the sources of funding turning now to the second factor, the change in banks ’ funding sources : at the same time as the change in the sources of banks ’ revenue, there has been a wider change relating to banks ’ liability side of the balance sheet. 6 in particular, this refers to the shift in banks ’ business models away from the traditional model of financing. in the traditional model, there was a heavy reliance on retail deposits, but this has been replaced by an increasing reliance on market - based sources of funding. the significant recourse to specific funding instruments, such as mortgage bonds and securitisation, has made banks increasingly dependent on capital markets, but at the same time, of course, less dependent on deposits, to expand their loan base. this is evident from both an upward trending total assets to deposits ratio of the largest euro area banks ( see chart 2. a ) and an increase in the loans to deposit ratio of large eu banks ( see chart 2. b ). to the extent that more stable retail deposit financing has been replaced by wholesale funding, banks may have become more exposed to market dynamics and perceptions, constituting a potential source of instability in the banking sector. 7 see banking supervision committee ( 2009 ), “ eu banking structures report ”, forthcoming in october. a. shleifer and r. w. vishny ( 2009 ), “ unstable banking ”, national bureau of economic research, working paper series no 14943. chart 2. a : total assets to total deposits of the largest euro area bank ( outstanding amounts, eonia banks ) source : bankscope. chart 2. b : loans to deposit ratio of large eu banks ( corrected for extreme outliers ) source : bankscope. securitisation markets and the current crisis the element of this change in banks ’ sources of funding that i would like to focus on in particular is securitisation. securitisation activity did indeed increase substantially in the years prior to the financial crisis ( see chart 3 ). as you know, securitisation and financial innovation in credit markets have generated significant changes, particularly in the financial structure of banks, and, more generally, in financial market activity in the euro area. it has become clear that the change in

stability. 14 a. demirguc - kunt and h. huizinga ( 2009 ), “ bank activity and funding strategies : the impact on risk and return ”, cepr discussion papers 7170, february. a. beltratti and r. m. stulz ( 2009 ), “ why did some banks perform better during the credit crisis? a crosscountry study of the impact of governance and regulation ”, charles a. dice center working paper no 200912, july. on this, see for example r. gropp and f. heider ( 2009 ), “ the determinants of bank capital structure ”, review of finance, forthcoming. for further information on macroprudential issues, see a. crockett, “ marrying the micro - and macro - prudential dimensions of financial stability ”, remarks before the eleventh international conference of banking supervisors, held in basel on 20 - 21 september 2000. see also the report of the high - level group on financial supervision in the eu chaired by jacques de larosiere, in brussels, on 25 february 2009. in the european union, following the publication of the report of the de larosiere group, the european commission proposed in may 2009 a set of ambitious reforms, including the creation of a new european systemic risk board responsible for macro - prudential oversight. the european council in june 2009 supported the european commission ’ s proposal. i am pleased to note that the relevant authorities have already started to take action in response to all these lessons that have been learnt from the financial crisis. with a view to strengthening the resilience of the banking sector, the regulatory reform agenda that has been launched and agreed internationally will : • introduce a leverage ratio, as a measure to curb banks ’ excessive balance sheet growth. this measure will be introduced initially as a supplement to the basel ii riskbased framework and, subject to proper calibration and review, as a minimum regulatory requirement ; • raise the quality, consistency, transparency and level of capital, namely the amount of common equity and other instruments of equally high loss - absorption capacity ; • introduce a framework for counter - cyclical capital buffers above the minimum capital requirement, which will be raised during economic upturns and be used in downturns, as well as promote more forward - looking provisions ; and • establish a minimum global standard for funding liquidity which includes a stressed liquidity coverage ratio requirement and a longer - term structural liquid