the financial crisis is the significant transformation which is taking place in the eu banking sector. the global overhaul of banking regulation and supervision resulting from the crisis, the demanding macroeconomic environment and the ongoing deleveraging and banking restructuring in some european countries are key factors which are shaping the future of the banking industry both in the short - and medium - term. in the context of the lessons learnt from the crisis and of the regulatory reform, the rest of my speech will focus on the main aspects of this reform and the developments in the size of banking sectors, banking business models and corporate governance. i will conclude by discussing the role of central banks in the new macro - prudential supervisory framework. iii. 1 regulatory and supervisory framework the crisis has revealed serious gaps in the regulatory and supervisory framework for financial institutions, both with regard to the prudential rules on capital and those on liquidity. several systemically important institutions that seemed to have a solid financial position before the crisis proved not to be sufficiently resilient to withstand the shocks that have hit the financial system in the past three years and a half. consequently, governments and central banks had to provide an unprecedented amount of support, and in parallel with this process, several initiatives have also been launched that resulted in a major overhaul of the regulatory and supervisory framework. a core element of the regulatory reform was the complete revision of the basel ii framework ( now commonly referred to as basel iii ) that has been recently agreed by the members of the basel committee and endorsed by the group of central bank governors and heads of supervision. the key elements of the new framework include : a new definition of regulatory capital that will improve both the quality and consistency of the capital base, the introduction of capital conservation buffer requirements that would constitute an additional layer of protection for banks, especially in periods of excessive credit growth, the strengthening of the risk coverage of the capital framework that would represent a revision of the prudential rules on securitisation and trading book activities as well as the counterparty credit risk framework, the planned introduction of a non - risk based leverage ratio that would serve as a supplementary measure to the risk - based requirements to contain the build - up of excessive leverage and address model risks associated with the risk - based capital framework, and bis central bankers ’ speeches the development of a liquidity risk framework that would aim at improving the resilience to liquidity shocks of the banks. the new measures will be introduced over a transition period of 8 years, and have

capital, their capital bases may need in some cases to be strengthened further in order to include only high quality resources with true loss absorbing capacity. given that the structure of the financial system is rather heterogeneous across eu countries, the national banking sectors will have to face different challenges in the years ahead. it is important to emphasise in this context that several policy initiatives have been launched recently to address the specific risks associated with systemically important financial institutions ( sifis ). in particular, the group of governors and heads of supervision agreed in september 2010 that sifis should comply with additional capital requirements over and above the basel iii minimum requirements. extensive work is currently being carried out under the aegis of the financial stability board to develop a framework for the regulation of global and national sifis and also to enhance the banks resolution regimes so as to be able to handle systemic crises in an effective and efficient way. at the same time, in the short - to medium - term it will be inevitable to improve the cost efficiency of banks as well as to make changes in the ownership structure and in the business activities of certain institutional models, while also restructuring some segments of the national banking sectors. to live under the “ new normal ”, banks must first get there. this may require consolidation as well as changes in corporate governance, transparency and business models. iii. 3 business strategies and corporate governance business models the crisis has shown the vulnerabilities of some business models. in particular, it has exposed the fragilities of those models based, on the one hand, on “ originate - to - distribute ” activities and securitisation techniques, and, on the other hand, on excessive dependence on wholesale and capital markets for funding. although no business model outperformed the others during the crisis, there is evidence that banking models based on higher diversification of activities and funding proved to be the most resilient. this explains why such models are becoming increasingly attractive within the european banking landscape 5. the banking supervision committee ( bsc ) of the escb conducted a study based on structured interviews of selected market participants and academics in london, frankfurt and paris during the winter 2009 – 2010. the questions focused on market participants ’ expectations in the medium term, i. e. during the coming 3 to 5 years, as regards the bank business models, consolidation and integration processes, and bank funding structures in the eu. the main results of this exercise were published in the ecb report “ eu banking