consistency of application in major jurisdictions. coordinated fsb / bcbs monitoring mechanisms will be in addition to the international monetary fund ’ s ( imf ) annual article iv surveillance and the imf and world bank ’ s periodic independent assessments across countries of compliance with international standards. 1 all in all, while there will be legitimate reasons for some countries to adopt standards more quickly or to go beyond international minimums, there will be much less scope in the future for countries to give their banks a competitive advantage by not fully implementing the agreed global rules. if some jurisdictions do not comply, i am certain that you will let us know. the iif ’ s commitment to fair application and peer review would complement official initiatives, and i urge you to develop a more formal approach. in the end, it is in your interests to comply. while there will be periods of exuberance during which aggressive banks and jurisdictions can sail close to the wind, financial history suggests that well - capitalised institutions and transparent systems will ultimately have premium ratings, valuations and outcomes. regulatory arbitrage let me turn to your second issue : regulatory arbitrage. there are valid concerns that the recent measures will push risk into shadow banking. even as reforms make the core of the financial system more resilient, they increase incentives to move classic banking activities, such as maturity transformation and credit intermediation, to the unregulated periphery. the imf and the world bank jointly conduct both the financial sector assessment program ( fsap ) and reports of the observance of standards and codes ( roscs ). bis central bankers ’ speeches this tendency is of particular concern, given the role the shadow banking sector played in the run - up to the crisis. in the final years of the boom, when complacency about liquidity reached its zenith, the scale of shadow banking activity exploded. the value of structured investment vehicles, for example, tripled in the three years to 2007, and credit default swaps grew sixfold. the feedback to the regulated sector was pernicious. financial institutions, including many banks, had come to rely on high levels of market and funding liquidity. for instance, shortterm money markets, particularly repo markets, were the predominant source of financing for the one - third increase in the gross leverage of american investment banks, as well as british and european banks. the system ’ s exposure to market confidence was enormous. the crisis exposed how boom - bust liquid

##ity cycles cascade through the shadow banking sector and reverberate on the regulated core. market forces proved inadequate to manage these swings between confidence and despair. today, despite the fact that shadow banking, or as we prefer to call it, market - based financing ( mbf ), is at least as large as the regulated sector in most jurisdictions, it is often unregulated and / or overseen by authorities without a systemic focus. this should change. as it does, regulation and supervision must strike a balance between mitigating systemic risks and realizing the benefits from financial deepening. properly structured, shadow banking can increase efficiency, provide diversification, and spur competition and innovation. it has the potential to make the system more robust, provided it does not rely on the regulated sector for liquidity or pretend to provide it with liquidity in times of stress. however, experience also teaches that shadow banking activities mutate, usually through complex and highly leveraged instruments, into regulatory gaps created by the response to the last crisis. with all of this in mind, there are four broad categories of regulatory initiatives under consideration. the first, and most important, is indirect regulation through limits on the size and nature of banks ’ exposure to shadow banking entities. examples include tighter consolidation rules for bank - sponsored conduits and higher risk - based capital requirements for liquidity lines. these measures will help to reduce opportunities for regulatory arbitrage, in which banks seek to reduce capital or liquidity requirements by organising transactions wholly or in part through shadow banking entities while retaining much of the underlying tail risk. the second approach would try to address systemic risks in shadow banking directly. for example, macroprudential measures are being considered to address procyclical haircut and collateral rules for securities lending and repo transactions. these measures could do much to dampen liquidity cycles. contagion could be further constrained by strengthening financial market infrastructure. in canada, in the coming months, a central counterparty ( ccp ) for repo transactions will be launched. this repo ccp will strengthen counterparty credit risk management, reduce collateral and balance sheet requirements via netting, and reduce the impact if there were a failure of one of its participants. by helping to ensure that core funding markets are continuously open, the heart of the financial system will be more resilient to shocks. the third approach is to regulate shadow banking activities themselves, such as money markets and exchange - traded funds ( etfs ),