until 2015, there ’ s plenty of time to work through these details and to undertake appropriate consultation. there is even more time for that in the case of the stable funding ratio, where implementation isn ’ t scheduled until 2018 and the details of the proposed basel standard are less well developed. so these are both areas where further work will be ongoing. the counter - cyclical capital buffer the basel iii package provides for an additional layer of capital to be set by national regulators based on the state of the credit cycle. the intention is that regulators would adjust the buffer so as to have a countercyclical influence, raising it in good times, and then releasing it to support lending when credit is tight. to avoid regulatory arbitrage, the standard includes a system of mutual recognition, which would have the effect of ensuring that the capital charge is based on the location where the lending occurs, rather than the home jurisdiction of the lender. the buffer proposal also specifies a standard quantitative indicator to assist in deciding when to activate it. glossing over the technical detail, this would be based on the ratio of aggregate credit to gdp. when that ratio is sufficiently above trend, it would be a signal to raise the buffer, and when it ’ s below trend, to lower it. in that way, it would allow surplus capital to be released to the system when most needed. i know there has been some scepticism about this kind of rule - based approach, and it ’ s important to recognise that the committee ’ s proposal leaves a lot of scope for flexibility and discretion at the national level. in my view, that ’ s going to be very much needed. having worked in the monetary policy area for many years, the indicator approach proposed here reminds me of an analytical device known as the taylor rule. the economist john taylor, some years ago, made the observation that a well - designed monetary policy would respond systematically to deviations of inflation and output from their normal values. it ’ s a relationship that can easily be verified in the data. taylor ’ s work sparked an army of researchers to try to estimate “ optimal ” taylor rules for setting the policy interest rate. it ’ s all useful analytical work, but it ’ s not a field that is open to definitive conclusions because the world is simply too complex to be summarised in that way. no - one would think of reducing the actual decision - making process to a mathematical formula, least of all one devised by an international committee.

see excess, and good - quality implementation of the rules that we already have. i think, by the way, that australia has been well served by its prudential regulator on this front. but it would be a shame if, in the international debate, those basics got lost in all the focus on re - writing the rules. 8 this leaves aside the special case of europe, where the supranational entity operates in some respects as a single jurisdiction. for a more detailed discussion, see fiechter et al : subsidiaries or branches : does one size fit all? imf staff discussion note 11 / 04, 7 march 2011. international regulatory bodies are clearly aware of the issue. see for example intensity and effectiveness of sifi supervision ( fsb 2 november 2010 ). bis central bankers ’ speeches end - piece i want to conclude, if i may, by saying a few words about the current situation. as you know, the reserve bank released its half - yearly financial stability review earlier today. as usual, we ’ ve given an account of the various uncertainties that exist around the global financial system. the tragic events in japan are a new element in that picture, as is the instability in north africa and the middle east. it ’ s going to take some time before the implications of all that can be assessed. but, acknowledging the uncertainties, the world financial system over the past half year has generally been improving. australian banks are in good shape, and they came through the crisis profitable and well capitalised. they have strengthened their liquidity positions and their use of deposit funding. australian businesses have reduced their gearing. households have raised their saving rates. when we think about what the post - crisis environment might look like, it seems unlikely that we ’ ll be going back to the days of consistent double - digit growth in credit that we saw in the pre - crisis years. that growth was driven in part by factors that can ’ t be repeated – the deregulation of the financial system in the 1980s, and the transition to low inflation in the 1990s. in the post - crisis environment, borrowers and investors are more cautious than they were, both at home and abroad. that ’ s likely to mean less demand for leverage and less growth in private balance sheets, even when the economy itself is growing strongly. if those trends continue, i think it will be good for financial stability, but it will also mean that our lending institutions have to get used to lower