and up to the present day : first, to strengthen the stability of the international banking system, and, second, to eliminate or mitigate distortions in international competition among banks due to differences in national regulation. undoubtedly, the main achievements of the first basel capital accord were that it represented a significant step towards international harmonisation of banking regulation – it was later applied by more than 100 countries – and that, for the first time, it put the focus on the relationship between the capital that banks hold and the weighted risks that banks take. after its implementation, it was not long before basel i came in for increasing criticism. first, it did not adequately cover all the risks to which banks were exposed. second, the risk weightings were presented in a very crude form that was an inadequate reflection of the actual underlying risks. despite such early warning signs, it was a long road that led to the implementation of basel ii. in the interim, financial turbulence, namely the mexican crisis ( 1994 - 95 ) and the asian crisis ( 1997 - 98 ) had further heightened the awareness among the g10 countries of the need for greater international cooperation in financial market oversight. as a consequence, the financial stability forum was founded in 1999 and the first working groups were entrusted with drawing up appropriate measures for financial regulation. out of this process the basel ii framework with its three pillars that you are all aware of was born and finally published in june 2004. basel ii was scheduled for implementation by end of 2006. however, owing to its complexity – especially with regard to the different approaches to assessing the minimum capital requirements – the timetable allowed fairly long transition periods for the change of supervisory regime. as a result, basel ii had not yet been fully implemented by most credit institutions when the subprime crisis emerged in the summer of 2007. in particular, many banks – including the eu ones – applied the new basel ii capital rules for the first time in 2008. consequently, we still have only a restricted knowledge, based on real data, of how basel ii works in practice. and, most notably, we cannot blame basel ii for the recent financial crisis. nevertheless, the financial crisis has highlighted deficiencies in financial regulation within and beyond the supervisory framework of basel ii that have to be addressed based on a thorough analysis. challenges in strengthening financial stability 3. 1 banking regulation the search for the underlying causes of the financial crisis has been intense. although a definitive assessment is still outstanding, it is widely agreed that the seeds of the crisis were

legal basis of the european commission proposal for a european resolution regime. this is disputed by the german government and will have to be resolved. it is related to the question of who the resolution agency is : it cannot be and should not be the ecb, as it is the supervisor. the most difficult question, because it is about money, is the resolution fund. we should have a joint fund, financed by a levy on banks. but it will take time to build up, say ten years. in the meantime, there should be a fiscal backstop. and it could be the esm. compare this with the united states, where the resolution agency is the federal deposit insurance corporation, which has a permanent credit line at the treasury. the esm could be the fiscal backstop to the european resolution agency. this would require a revision of the esm treaty ; it is a lower hurdle than changing the european treaty. i think it is feasible before the european parliament is out. you may soon be on the other side of the negotiating table, as finance minister in a ” grand coalition ”. my term at the ecb ends in 2019. my intention is to fulfil that term. bis central bankers ’ speeches