thomas jordan : bank regulation – what went wrong? what will improve? summary of a speech by mr thomas jordan, vice - chairman of the governing board of the swiss national bank, at the forum fur universitat und gesellschaft, berne, 24 march 2010. the complete speech can be found in german on the swiss national bank ’ s website ( www. snb. ch ). * * * the financial crisis has caused enormous damage. massive losses were recorded in the global banking system. many countries have gone through the worst recession since the second world war. government rescue measures had to be implemented to stabilise the financial system. existing bank regulations were not able to prevent the crisis, nor were they able to at least contain the damage to such an extent that government rescue packages would not have become necessary. while before the financial crisis, there was considerable uncertainty about possible shortcomings in bank regulation, these have now become apparent and will have to be tackled. in addition, the provision of implicit state guarantees has made the need for action even more urgent. big banks – believing that they will receive government assistance if they run into problems – have even stronger incentives now to take on excessive risk. this increases the risk of another crisis and erodes the fundamental principle of the market economy – competition. once again, in the future, banks will have to bear their own risks. the failure of a bank should no longer jeopardise the stability of our financial system. only then, will our financial system become less prone to risk and will the extent of future crises clearly decrease. in order to achieve this goal, several measures have been decided on in switzerland. first, new capital adequacy requirements were enacted in 2008. big banks will have to double their risk - weighted capital. in addition, they will have to hold a minimum amount of equity capital, irrespective of the risk models they use internally. this is because the crisis has shown that internal risk models massively underestimated the risks taken. second, new liquidity regulations will be adopted. in the future, big banks will have to hold a sufficient amount of high - quality liquid funds to be able to cover unexpected liquidity losses for a period of at least 30 days. the reason for this is that, in the financial crisis, even solvent banks had liquidity problems. finally, measures to solve the “ too big to fail ” issue must be put into practice. no bank should be so systemically

) ; the minister of finance has confirmed and showed his determination to continue with the required policy of financial discipline that will gradually reduce the deficit in the budget as a percentage of gross domestic product. there is, however, still the danger of escalating inflation that cannot be swept under the carpet at this juncture. after reaching an acceptable low level of only 5. 5 per cent over the twelve months up to april 1996, the rate of increase in the consumer price index escalated to 9. 4 per cent in december 1996. inflation, however, lags behind changes in the monetary aggregates and is, at this stage, still stimulated by the depreciation of the rand last year, and the relatively large increases in the money supply during the 1995 / 96 period. it is of the utmost importance, however, that a restrictive monetary policy shall now be retained to make sure that the rate of inflation will also gradually be tamed again. 5. monetary policy options for 1997 it remains the main task and priority of monetary policy in south africa to fight against inflation. during 1996, the disturbances in the foreign exchange market temporarily diverted the attention from this prime objective of monetary policy. indeed, in the longer term, greater stability in the foreign exchange market will only become sustainable once the rate of inflation has been brought more or less in line with the average rate of inflation in the economies of our major trading partners and international competitors. despite the periodic efforts of media reporters to extort a commitment from the authorities to a certain pre - defined exchange rate for the rand, it remains our view that in the contemporary complex market for foreign exchange, it is not possible to define an equilibrium exchange rate a priori, or, in the case of the south african reserve bank, with the limited amount of foreign exchange at its disposal, to manipulate the exchange rate of the rand permanently in any direction against market forces. as far as the bank ’ s policy on foreign exchange is concerned, it is hoped that the more favourable conditions now experienced in the market will continue throughout 1997, and will enable us to pursue the longer - term objectives of : building up the total foreign reserves to a more comfortable level ; reducing the reserve bank ’ s role in the forward foreign exchange market ; and gradually phasing out the remaining exchange controls. to the extent that these three objectives provide conflicts within themselves, important policy decisions will have to be taken between the bank and the minister of finance on the relative importance that should be attached to each one of