participants, regulators and supervisors. unlike in evolution, the objective has been set. nevertheless, to achieve the desired goals, interactions with other policy areas as well as cross - border spillovers still have to be taken into account. as a consequence, market participants themselves will have to adapt, to comply with new regulatory requirements and to develop their own responses to a changing environment. some responses might turn out to be unnecessary for a healthy economy. but former fed chairman paul volcker was taking things to extremes when he said, “ the only useful banking innovation was the invention of the atm ”. other innovations, however, are beneficial to the development of our financial system, and those should be the ones that survive. the potential failure of the financial system can come with a huge price tag for society. for this very reason, a stable system is essential. macroprudential policy will have a key part to play in this, and national macroprudential responsibilities are about to be assigned in many countries. appropriate instruments now need to be developed and implemented ; we will have to “ walk the talk ”. this will be a major challenge for some time to come. thank you very much for your attention to the topic which is close to my heart. bis central bankers ’ speeches

illusion that the ratios chosen in 1988 were arrived through a scientific process. if i may digress briefly into anecdote, i recall that bill mcdonough once related that he had asked his staff why, under the market risk amendment to the capital accord, it had been decided to apply a three - times multiplier to the outcome of var models. why three times? the answer came back that three times was selected because “ two times was too low and four times was too high ”. i imagine that the process of selecting 4 % minimum equity was very similar to this. the selection of a capital ratio ought, ideally, to depend upon answers to the following questions : what is the risk we are trying to limit? what is a good measure of that risk? what residual level of risk are we willing to tolerate? and how do we fix a capital level so as to achieve that residual level? these questions were not explicitly addressed back in 1988, although possibly we can infer some of the implicit answers from the regime that was established. however, although neither 1988 ’ s accord ’ s measure of risk nor its selection of the minimum capital ratio may have been scientifically derived, the committee ’ s statement that we will at least maintain the overall level of capital in the system indicates that, ex post, they are reasonably happy with what the 1988 accord achieved. but what exactly do they mean by this statement? and how do we go about achieving their intended outcome? is it, indeed, a reasonable outcome to strive for? i will try to address these questions. one way of thinking about the 1988 accord is that, aimed principally at internationally active g10 banks, and using crude measures of risk that assumed some sort of average portfolio and profile of risk for such banks, it set a “ confidence level ” for the soundness of individual banks and hence the system. looked at in this light, the committee ’ s statement means that the authorities do not intend to tolerate a different - ie lower - level of confidence following the introduction of the new accord. in other words, under the new regime, the average internationally - active g10 bank will not be more likely to fail than it would be under the old regime. this seems a fairly sensible way to view the relationship of the old accord with the new version. it leaves plenty of scope to see redistribution of required capital, from less - than - averagely risky banks to more risky ones. it also leaves scope for overall capital to reduce over