promote greater use of central counterparties, increased regulatory and public transparency, wider involvement of exchanges and electronic trading platforms for actively - traded products, and stronger operational and risk management practices. third, the financial system cannot operate efficiently without leverage. the preferences of businesses and households in their regular economic activities require that intermediation and maturity transformation be conducted somewhere in the financial system. of course, much of the turmoil we witnessed across financial markets was due to the build - up of excessive leverage in the system, and we cannot miss the chance to learn from this painful lesson. but we should also understand that a reduction in leverage to near zero in the financial system is not desirable, as it would significantly reduce the efficiency of credit intermediation. instead, discussion should be focused on how to make the use of leverage less procyclical, to identify those sources of leverage that are most productive and to better monitor the vulnerabilities that can result from excessive leverage. conclusion the crisis offered a rare view into how our capital markets function under extreme stress. those circumstances revealed vastly different degrees of robustness across alternative segments of our financial system. at one end of the spectrum, markets for certain dollar assets demonstrated considerable resilience to financial stress and were extremely appealing to investors in stress circumstances. at the other end, the crisis highlighted that segments of u. s. credit markets had structural shortcomings that must be addressed to ensure the viability of these markets going forward. those shortcomings have necessitated two waves of policy response. the first wave was aimed at putting out the fire. to that end, the crisis demonstrated that u. s. and global authorities have the ability and willingness to respond in a manner that meets dollar funding needs in a time of crisis and that promotes broader market stability. the second wave is aimed at building a sounder financial system for the future. those efforts are still underway, and the reform process may be long and involved. however, i am hopeful that many of the shortcomings are likely to be addressed, and that we will emerge from this episode with a more robust and efficient financial system.

##ary instruments could generate countercyclical effects, thereby guarding against possible imbalances in the financial system. for instance, one possibility would be an obligation, which would apply to all banks, to accumulate additional capital buffers in times of excessive credit growth. however, to date, experience with this kind of regulation is limited. it is therefore necessary to evaluate these instruments carefully. do the measures contribute to the robustness of the regulatory setup? a third important criterion is that consideration must be given to the fact that each individual measure, on its own, is either insufficient, or displays shortcomings that are often not directly obvious, or can be manipulated or even avoided. these latter three problems become particularly acute as the measures become more complex. one way of countering these weak points is to make use of simple instruments, as an alternative to, or to supplement complex instruments. the benefits of simple instruments are, first, that although they are often less detailed and specific, they are more effective in a crisis. for instance, it is true that a straightforward restriction in banks ’ leverage using a simple instrument, the leverage ratio, does not do justice to the different risk classes of assets and may, in some circumstances, have unintended effects or create false incentives, as can any other regulation. 6 however, excessive leverage, in an absolute sense, is usually a clear indication that a company is carrying a high level of risk with regard to its solvency. in the recent financial crisis, the leverage ratio of certain financial institutions was so high that their entire capital would have been eroded as a result of a mere 2 % loss in the value of their assets. it could then be clearly demonstrated that the institutions with relatively low leverage weathered the crisis much better than those with high leverage. 7 second, simple instruments offset the shortcomings of complex rules, in particular. in this way they provide a kind of safety net in case the complex regulatory approach emits incorrect signals. for instance, the a “ capital conservation buffer ” whose function is to achieve this effect is also planned within the basel iii framework. with respect to the leverage ratio, it is argued that this measure creates incentives to substitute high - risk assets for low - risk assets, thereby increasing a bank ’ s overall risk exposure. comparing 2006 data for a broad sample of banks, a recent bis study concludes that the mean leverage ratio of eventually severely stressed banks were lower than the mean leverage ratio of non - stressed banks. cf. bis (