credible option lies at the core of the solution. finally, there was also problems in the management culture of banks. the culture of the customer focused retail and commercial banking is inherently different from the one of the transaction based trading oriented banking. 12 the transaction - oriented management and compensation culture of trading spread to more traditional banking. this provided incentives to risk - taking. the former citigroup architect, mr. john reed, has recently described how this “ cultural mixing ” had an impact on risk - taking. in traditional banking risk officers might easily say “ no ” if they judged a proposed new loan not good enough. however, if the loan officer ’ s pay is linked to making new loans, as increasingly happened, then saying “ no ” becomes much more difficult in practice. last days events and currency exchange manipulation incidents have once more brought the issue of corporate culture of banks to the surface. [ slide 10 – policy reforms ] regulatory and macroprudential policy reforms [ slide 11 – financial market liberalisation and governance must be complements ] before the crisis the benefits of deeper financial integration were pursued via market liberalization. improving the governance of financial markets was lagging behind, leaving the system vulnerable to crises. we now understand that liberalization and governance are complements. we need them both to reap the benefits of financial integration in a sustainable manner. [ slide 12 – focus of current regulatory reforms ] much has already been done to improve financial stability and resilience of financial institutions after the crisis, particularly of those seen as too systemically important to fail. in an ideal world the externality imposed on the society by large systemically important banks might be dealt with by a single optimally designed regulatory instrument. however, in the real world subject to substantial uncertainties concerning the nature of risks and their measurement, it is better to rely on several regulatory instruments. 13 first, basel iii agreement which is implemented here in europe through the capital requirement regulation and directive will strengthen banks ’ capital and liquidity positions. this is a major step to improve banks ’ resilience, but will also reduce incentives to take excessive risks across different banking operations. basel iii also tackles the too - big - to - fail problem by imposing an extra capital requirement on international, systemically important financial institutions. liquidity requirements which previously did not exist bring additional important resilience as liquidity typically dries up when a systemic crisis starts. boot and ratnovski ( 2012 ), “ banking and trading ”, im

erkki liikanen : the changing financial environment in latin america and global imbalances remarks by mr erkki liikanen, governor of the bank of finland, at the iii high - level seminar of the eurosystem and latin american central banks, madrid, 4 december 2006. * * * latin american countries have successfully reduced their traditional sources of vulnerability in recent years. however, despite the stronger fundamentals, a possible disorderly adjustment of global imbalances would pose serious risks to the region. against this background, some of the key questions are : 1 ) how well are the countries in the region prepared for possible future crises, 2 ) what can the authorities do to make the economies better withstand adverse economic conditions, and 3 ) what role can latin america play in the adjustment of global imbalances? to address these questions, i will focus my comments on three sets of issues. first, i will discuss briefly developments that have led to a significant reduction in external vulnerability in latin american countries. here i want to highlight the role that the strengthening of institutional frameworks has had in reducing economic vulnerability. second, i will try to sketch out a possible disruptive adjustment scenario in order to examine what types of policies are needed to prepare the economies for more turbulent economic conditions. finally, i will talk a bit about latin america's role in the adjustment of global imbalances by highlighting some key differences between the region and those emerging market economies that are the main contributors to global imbalances. 1. reducing vulnerabilities : importance of institutional frameworks the background research paper prepared by the ecb staff ( “ financial vulnerabilities in latin american economies : a reappraisal " ) gives an excellent overview of the evolution of financial vulnerability in latin american countries. the trend of narrowing spreads has been decomposed into three factors : reduced risk aversion, ample global liquidity and improved country specific factors. the paper also analyses the role that different country specific factors have played in this development. such analysis is highly valuable for assessing the nature of risks ahead and appropriate policy responses to mitigate them. the increased appetite for risk has been the main driver behind the narrowing of spreads in all emes, yet the effect has been particularly pronounced in latin america. however, for most countries in the region, sensitivity to the global risk aversion has diminished in recent years. similarly, the region seems to have become less sensitive to changes in the global liquidity conditions as