- governance practices made conditions worse, as large corporate bankruptcies imposed substantial losses on investors, lenders, and employees. these domestic events increased the uncertainty about earnings reported by other firms and dampened financial markets that were already weak. abroad, argentina ’ s economic and political difficulties reminded us, yet again, that exposures to emerging economies can also present substantial risk. throughout this period, the u. s. banking system remained strong, reporting continuing record earnings and profitability, despite a slip in asset quality. during the first half of this year, u. s. insured commercial banks earned more than $ 44. 5 billion and an annualized return on assets of 1. 37 percent. both figures represent the industry ’ s best six - month performance ever and reflect impressive growth on top of what were already impressive results. net interest income was the primary driver of increased revenue, despite a notable decline in commercial loan volume. loan loss provisions remained relatively high by the standards of most of the past decade but dipped notably from the second half of 2001. net charge - offs, which were concentrated among commercial loans of large banks and credit card specialty lenders, also dropped. while this improvement since year - end may signal that problem assets have peaked, some large institutions have not yet fully recognized the results of this year ’ s supervisory assessment of shared national credits. consequently, we may see further deterioration in asset quality during the periods ahead. moreover, the general economy needs to strengthen further before we can be much more comfortable that we ’ re out of the woods. as noted, current weaknesses appear to be largely within the commercial loan portfolios of large regional and money center banks rather than those of smaller institutions. even the problems of large banks could be viewed as mild, however, given the shocks felt by many in their customer base. in some respects, bank performance may reflect improvements in risk - management practices and also the greater diversification of revenues and exposures that has occurred in the past decade. bank performance also reflects, i believe, a greater awareness by institutions throughout the banking system that they should promptly address problems as they emerge. during this recession and recovery, both the banking industry and the regulatory agencies appear to have responded well, by acting in a timely manner and without unnecessarily constraining bank credit. that positive outcome was made easier, of course, because the banking system was strong as challenges began to build. because the industry had the earnings and capital to absorb increased losses, there

the major question in this context is about the optimal level of capital banks need to hold. so what is a sufficient capital basis for banks in the long run? i would like to see that from a functional perspective : a bank is sufficiently capitalized, when – even after a major external shock has materialized – the bank is still able to refinance itself on the market at reasonable spreads. banks on their own define what reasonable spreads are from their perspective as spreads differ depending on size, business model and region. hence, investors that fund european banks rather than regulators or supervisors define the longterm optimal level of capitalization. this means also that there is an upper limit for bank capitalization. above a certain level you will not find anybody to invest in bank shares. similar and connected to the issue of optimal capital level is the introduction of mrel ( the minimum requirement for own funds and eligible liabilities ) and therefore the question on how much mrel is needed? the mrel requirement is designed to ensure a ‘ bail - in ’ of shareholders and creditors in the case of a failing bank. it safeguards that a bank has sufficient shares and debt instruments issued to absorb losses or to convert into new shares to recapitalize systemic functions. in particular, it is questionable how capital buffers are linked to the amount of mrel needed. in my opinion, it strongly depends on the bank ‘ s individual resolution strategy. if a bank is not recapitalized in a resolution it does not need to mirror its capital buffers in the mrel amount. moreover, if a bank in resolution is fully or close to 100 % recapitalized it will also not need to include its capital buffers fully in the mrel amount as capital buffers shall absorb losses in times of stressed periods. however, the right balance of mrel has to be found to ensure that the recapitalized institute has sufficient capital to access funding markets. let me come to another often quoted assumption in the context of financial regulation : higher capital requirements restrict bank credit supply. what do we observe? higher capital requirements cause deleveraging but without hampering credit to private sector7 : capital has contributed the lion ’ s share to the leverage reduction in the euro area ( 88 % ) and austria ( 73 % ) between oct. 2008 and feb. 2014. contrary to popular opinion, bank funding for the real economy and for governments has increased even after the crisis, despite substantial deleveraging both in