system. measures are also needed to tackle negative systemic developments resulting from the interaction of individual decisions even when well - founded – measures which aim to mitigate negative systemic effects on the stability of financial institutions. such measures would be incumbent upon the financial literacy and skills of the economic agents and, in particular, their 1 / 3 bis central bankers'speeches ability to interpret the signs that result from the intervention of the prudential authorities. as a rule, a reduced capacity to interpret this intervention creates a greater risk of a bubble developing in the market and as a consequence determines a need for more interventionist prudential measures on the credit granting side or on the savings application side, to guarantee financial stability. financial literacy and education are therefore key for financial stability and for the nature of conduct and macroprudential supervision policies. in short, to safeguard financial stability, it is not enough to monitor individual choices or to regulate the conduct of banking institutions with their customers. it is also necessary to monitor the system as a whole, to mitigate the negative externalities of individual actions, as well as the supervision of each financial institution to ensure its financial strength, in particular its capacity to absorb the risks resulting from the application of the resources entrusted to it. the relevance of financial literacy and education has increased even more with the globalisation of markets and growing sophistication of products. widespread access to banking products and services that are ever more diverse and complex and the emergence of new sales channels have all brought new risk sources. we have therefore seen, at international level, the progressive strengthening of the framework of rights granted to banking customers, a broadening of areas of intervention for conduct supervision and more intrusive action by the supervisors. the objective is to encourage the adaptation of products and services to the characteristics and needs of customers and prevent conflicts between the interests of customers and institutions. financial information and education for banking customers has also come to be seen as a structural dimension of banking conduct supervision, complementary to regulation and oversight. more informed customers and with a greater ability to understand the characteristics of banking products and services are generally more attentive and demanding. they are also better prepared to choose banking products and services more suited to their financial situation, needs and risk profile, thus contributing to the efficient operation of the market and to safeguard financial stability. banco de portugal ’ s conduct supervision strategy banco de portugal began exercising its conduct supervision mandate at the outbreak of the international financial crisis. we have adopted a strategy based on three

excesses of finance without jeopardizing its much needed role? an optimistic view about this possibility may rely on a positive assessment of all the solutions that have been put forward in several reports and proposals that have flooded our desks, many of which have been adopted in various legislative projects that are now being debated. let me go through several of those proposals with brief comments as many of them are widely known. i just want to provide you with my own sense of their relative importance and later on i will dwell upon a few that i think have not been fully developed or considered. 1. creation of a macro - prudential responsibility explicitly attributed to an existing or newly created institution. this is very important as the crisis showed that micro supervision is not sufficient when the risks come from the overall situation of the economy or the financial markets. doubts remain about the exact competences to be given to the institutions in charge of this new role. 2. introduction of new standards demanding more and better capital along the lines of the basel committee proposals ( the increase in capital against trading book risks has already been the subject of legislation in europe ). 3. reduction of the pro - cyclicality of the regulatory framework, through a system of capital buffers or dynamic provisions ( or reserves ) changeable with the economic cycle. in the first method, required capital would increase in good years, when loan losses are below long - run averages, creating capital buffers which would be drawn down in recession years as losses increase. personally, i prefer dynamic provisions but any of the methods is preferable to the existing situation. 4. correction of the pro - cyclical bias of present accounting standards, which allow profits to be increased with unrealized capital gains in periods of booming asset prices, and exaggerate declining profits in bad times through the effect of unrealized capital losses. besides the changes in standards to permit a more flexible treatment of asset prices in periods of market stress and illiquidity, there is the need to introduce a concept of an economic cycle reserve, along the lines proposed in the turner review, calculated with the same method used in the previous item ( 3 ), in order to set aside profit in good times to reduce losses in depressed economic cycles of the future. it is indeed necessary to affect the accounting reports in order to avoid that volatile unrealized gains influence share prices and consequent behaviour of financial institutions. 5. introduction of a new maximum absolute leverage ratio ( risk unweighted