not forget that banking tends to be a cyclical business irrespective of regulatory requirements. nonetheless, the basel committee has begun a comprehensive review of the potential procyclicality of the basel ii framework. the objective is to promote adequate capital buffers over the credit cycle and to mitigate the risk that the minimum capital requirement magnifies the procyclicality of the financial system. under discussion are ways to promote a high quality tier 1 capital buffer that banks would increase in good times and be allowed to use in difficult times. supervisors are also reviewing the need to supplement the current risk - based approaches with simple, transparent gross measures of risk. this would constrain the amount of leverage banks could have in good times and therefore also contain the degree of deleveraging in bad times. let me now turn to lessons that can be drawn from the financial crisis with regards to supervisory arrangements. over the past one and a half years supervisory arrangements around the world have been put to the test. these real stress tests have provided us with important insights into the pros and cons of different supervisory arrangements. and, though there is no single optimal supervisory arrangement, three lessons can be drawn. first, as macroprudential supervision and microprudential supervision strongly overlap, central bankers and prudential supervisors should cooperate closely and continuously. second, financial supervisors need to step up international cooperation, simply because the financial industry is particularly internationalized. third, while prudential and conduct of business supervision are distinctly different, they are complementary and should both receive due attention. separating prudential and conduct of business supervision institutionally helps to keep both supervisory goals in clear sight. as financial sectors today are more concentrated, more integrated and more exposed to the financial markets than ever before, problems at individual institutions are increasingly likely to have systemic consequences. indeed, during the financial crisis we saw several examples, most notably the collapse of lehman brothers in september 2008 which had a truly systemic impact. these events have demonstrated that the distinction between macro - and microprudential stability is hypothetical in practice. therefore, there is an urgent need for close and continuous cooperation between macro - and microprudential supervisors, of course with due observance of the relevant legal provisions. such cooperation can be achieved in different institutional settings. also when the central bank plays no role in microprudential supervision, extensive micro - macro cooperation can be and in fact should be organized. the need for effective interplay

prudential supervisors ’ main concern is the safety and soundness of financial institutions, conduct of business supervisors first and foremost strive for a fair and transparent market. undeniably both types of supervision are important and in fact they are generally reinforcing. let me give an example to illustrate this. in the united states, home loans were extended to very risky borrowers, with little or no income and few, if any, assets. from a conduct of business perspective, these us consumers were not treated fairly. had this practice been stopped in time by the relevant conduct of business supervisor, we would have fewer problems now. unfortunately practice did not stop, but rather worsened. and now these us mortgages are awfully problematic from a prudential point of view. that being said, prudential and conduct of business supervision can also be conflicting. prudential supervisors work most effectively behind the scenes. this contrasts with conduct of business supervision, which benefits from being in the public eye. publicity helps to warn off consumers, investors and the industry from misconduct and wrongful practices. if both types of financial supervision are exercised by the same organization, there is the risk that an inappropriate balance is struck. therefore, in integrated supervisory authorities, arrangements can and should be made to ensure the necessary amount of resources is allocated to both types of supervision. establishing such arrangements, however, can be rather challenging in practice. indeed, a key finding of the uk fsa ’ s internal audit review in light of northern rock was that too many resources had been allocated to conduct of business supervision, and too few to prudential risks. in the netherlands, and also in australia, the danger that either prudential or conduct of business supervision will be overlooked has been addressed institutionally. in our objectivebased supervisory arrangement, prudential and conduct of business supervision are performed by two separate institutions. the former type of supervision is the responsibility of dnb ; the latter is the remit of the dutch conduct of business supervisor, the authority for the financial markets. consequently, our institutional set - up leads to a transparent consideration of prudential interests on the one hand and conduct of business interests on the other. let me give a clear example to illustrate this point. some years ago a dutch subsidiary of a foreign bank had neglected its duty of care. from a conduct of business perspective, the bank had to be penalized for this. it was clear, however, that this would entail the end of