the same time, however, it is not difficult to see that if the deficit continues to run at a level close to 7 percent of gdp — and most forecasts assume it will for some time — the net international investment position of the united states will deteriorate sharply, u. s. net obligations to the rest of the world will rise to a very substantial share of gdp, and a growing share of u. s. income will have to go to service those obligations. this fact alone suggests that something will have to give eventually, and this raises the interesting question of how these imbalances have persisted on a path that seems unsustainable with so little evidence of rising risk premia. part of the answer seems to lie in the fact that these capital inflows into the united states, however, are not solely the result of the decisions of private actors, but reflect official intervention by countries with exchange rate regimes tied to the dollar, including those in asia and the major oil exporters. research at the federal reserve and outside suggests the scale of foreign official accumulation of u. s. assets has put downward pressure on u. s. interest rates, with estimates of the effect ranging from small to quite significant. if this is right, the apparent reduction in real rates is less likely to signal concern over expectations of future growth and future returns on investment, and is more likely to signal the special consequences of these exchange rate arrangements and their effects on private behavior, as well as the increase in international capital mobility. what then can we say about the implications of the pattern of imbalances we see today? the trajectory of the u. s. current account deficit has led most observers to conclude the u. s. external imbalance is unsustainably large and will have to come down over time. beyond this general judgment about unsustainability, there is little consensus on how this adjustment process will unfold or on its implications for economic activity and financial markets. the plausible outcomes range from the gradual and benign to the more precipitous and damaging. the size of the imbalance and the inevitability of eventual adjustment, however, mean that the world will be living for a considerable period of time with some risk of large movements in relative prices, greater volatility in asset prices, and periods of slower growth in the united states and in the rest of the world. that said, a number of observers have suggested that living with these imbalances for an

many cases weightier determining factors than solvency requirements themselves for financial institutions. it is thus necessary to harness the ongoing revision of european legislation and the subsequent re - definition of the policies to be pursued by the resolution authorities so as to fine - tune demands in a way that provides for the orderly adjustment of the industry to the new regime. as earlier discussed, adding flexibility to some requirements and setting transitional arrangements for others may be of help here, while also reinforcing the authorities ’ ability to manage crises in the short and medium term. all told, institutions should be mindful that the new resolution framework will require those banks that exceed a certain size and are liable to generate systemic risk to ensure that their balance sheet structure allows their resolution at the expense, essentially, of their shareholders and creditors. they should, therefore, ensure that their business model is compatible with the issuance of loss - absorbing instruments on the capital markets and that their income statements allow for the remuneration of the supplementary risk that the new resolution regime entails for holders of bank debt. it thus seems likely that several institutions will face objective difficulties adjusting to the recently established resolution framework. these new regulations, therefore, contribute to reinforcing the perception of excess capacity in the sector and, foreseeably, they will contribute to promoting a change in the industry structure that will correct such excess by means of consolidation processes giving rise to banks more capable of comfortably complying with the new demands. the supervisor ’ s role essentially consists of setting in 9 / 10 place the means needed for this seemingly inevitable adjustment process to unfold in as orderly a fashion as possible. 10 / 10