role in making our financial markets more efficient. and they are likely in some circumstances to help markets equilibrate more quickly in conditions of stress, as was the case in the summer of 2003, when they helped meet a substantial increase in mortgage - related hedging demand from banks and the gses. assets managed by hedge funds have grown very rapidly, more than doubling since 1998 to current estimates in the range of one trillion dollars. gross credit exposure and potential future credit exposure to hedge funds as a group are probably larger today relative to the capital of banks and investment banks, although also likely more diversified. overall leverage seems lower relative to 1998, and may not look that high relative to banks and investment banks, but leverage is hard to measure and the quality of the data is not very good. while hedge funds are large enough to provide meaningful efficiency and liquidity benefits to some key markets, they are also large enough that the failure of a major hedge fund or number of funds could have a significant impact directly and indirectly on the major banks and investment banks in the united states. within the clearance and settlement infrastructure, economies of scale have led to high levels of concentration in some areas. two institutions together now handle the vast majority of clearing business for u. s. government securities and the associated triparty repo market in which over $ 1 trillion turns over twice each day. the dramatic increase in the volume of transactions handled by the core parts of the payments infrastructure places substantially greater demands on the operations of those institutions. moreover, many of the major payment and settlement utilities operate across national boundaries, raising complicated questions for the appropriate allocation of oversight responsibility. alongside these changes in the relative size of institutions and in market structure, financial innovation has led to a dramatic increase in the complexity of the risk management challenge. the frontier of financial innovation inevitably advances somewhat ahead of improvements in the risk management and clearing infrastructure. the models used to assess risk in the more novel areas of finance are, by definition, less grounded in experience and less valuable in anticipating how prices and correlations change in conditions of stress. consensus on the appropriate accounting treatment is less well established. with the dramatic increase in the scope of operations of the major financial institutions, the challenge of pulling together an integrated risk management framework that captures exposures across the entirety of the firm is much greater. the potential for conflicts of interest and opportunities for fraud are greater, placing significant burdens on internal compliance regimes. the changes in regulation and technology that have increased the opportunities

to the capital buffers that they retain on top of the existing minimum. if banks target buffers above the regulatory minimum, which is an endogenous market outcome, they may need to raise even larger amounts of equity than what can be expected by just looking at the current package. we know from empirical studies that weaker capitalized banks typically exhibit weak loan growth compared to other better - capitalized banks. we also know that banks may find it less costly to adjust loan volumes and loan pricing than capital, as frictions in the market for bank capital make the latter option more expensive. while the crisis has clearly had global ramifications, its impact on financial systems has not been uniform across the world. financial structures differ greatly between countries and there needs to be scope for different countries to tailor solutions to their circumstances and structures, while, at the same time, doing so within a globally agreed framework. for instance, our experience in france is that our banks ’ universal model has weathered the storm relatively well. it would be a major paradox to put in place rules that would challenge such models. finally, any regulatory framework needs to manage regulatory arbitrage and keep up with innovation and other forms of structural changes. for this, a necessary but not sufficient condition is that standards be comprehensive in coverage and consistent across jurisdictions. i am not sure, for instance, that the leverage ratio, if it were to be implemented as a compulsory instrument, would meet this double test. given existing accounting divergences, consistency will be very difficult to achieve. furthermore, it is likely to encourage migration of credit activities towards other – less regulated – parts of the financial system. convergence between accounting standards is a precondition for a consistent implementation of some of the prudential reforms discussed by the basel committee. it is also essential that new prudential standards for banks become truly universal. we should not underestimate the difficulties on the road to accounting and regulatory convergence. how can we reduce the procyclicality of financial systems? our accounting and prudential regimes have increased procyclicality in recent years. this is detrimental to a stable flow of credit to the economy. in a mark - to - market environment, asset price increases quickly translate into a larger capital base of financial institutions, which, in turn, trigger additional demand for assets and a further increase in their prices. a spiral is launched. actually this is a kind of “ inverted demand curve ” where demand increases with prices and vice