the likelihood of and the fallout from future crises. it would be an inexcusable mistake to miss this opportunity to see through fundamental regulatory reform. we have to address the vulnerabilities that were at the root of this crisis and are likely to be at the root of those in the future. for this purpose, we need simple, effective measures that can be implemented rapidly once the crisis is over. there are intensive efforts under way to increase the resilience of the financial system. with the support of the g20 leaders, the financial stability board ( fsb ) has initiated an impressive number of reform projects. 3 good progress has been made on many measures. in some important areas, however, decisions have yet to be taken. in line with proposals by the fsb, i believe we need to pursue a dual - track approach to reforming the global financial system, combining preventive measures with measures facilitating the orderly resolution of large international banks in the event of a future crisis. an ounce of prevention we have all been told that an ounce of prevention is worth a pound of cure. considering the enormous costs associated with the cure of the current crisis, this holds especially true when it comes to financial stability. most importantly, we need to strengthen the shock absorbers of the financial system. in the context of banks this means that they have to hold more capital and more liquidity. strengthened shock absorbers in the form of higher capital and liquidity buffers have several beneficial effects. bigger buffers enable banks to absorb larger negative shocks without triggering an idiosyncratic, let alone a systemic crisis. furthermore, bigger buffers ensure that banks themselves bear a larger share of their downside risks. not only does this reduce the potential burden for taxpayers, but it also creates stronger incentives for the banks themselves to operate prudently. if shareholders know that they have to absorb potential barry eichengreen and michael d. bordo : “ crises now and then : what lessons from the last era of financial globalization? ”, nber working paper 8715, january 2002. “ report of the financial stability forum on enhancing market and institutional resilience ”, april 2008, and the recommendations and principles to strengthen financial systems that the fsb published on 2 april 2009. future losses rather than passing them on to taxpayers, they will likely become less willing to let management engage in excessively risky activities. ultimately, this incentive effect can help make future crises less likely. strengthening capital requirements the crisis

philipp hildebrand : banking regulation – changing the rules of the game speech by mr philipp hildebrand, vice - chairman of the governing board of the swiss national bank, at the twelfth annual international banking conference, federal reserve bank of chicago, chicago, 25 september 2009. i would like to thank jurg blum, rita kobel, and signe krogstrup for their valuable support in drafting this speech. i also want to thank bertrand rime for helpful comments and discussions. * * * introduction i want to thank the federal reserve bank of chicago for the kind invitation and the opportunity to speak to you this evening. it is a privilege to be here. a year ago, we were in the midst of a perfect financial storm. following the bankruptcy of lehman brothers in midseptember, the imminent collapse of the global financial system became a distinct possibility. to avert such an outcome, a bold and unprecedented international policy response was needed and promptly initiated. in the us as well as in europe, several of the world ’ s largest financial institutions required public capital injections, and their nondeposit liabilities had to be guaranteed. a number of countries were forced to expand their deposit insurance programs. in some cases, governments or central banks purchased or guaranteed bank assets. 1 in spite of the rapid policy response aimed at stabilizing the global financial system, the broader economy was heavily hit. trade and industrial production literally fell off a cliff. in the fourth quarter of 2008 and the first quarter of 2009, global economic activity recorded its weakest performance in decades. today, the situation has improved very significantly. the unprecedented global policy response has had its intended effect. the financial system is showing clear signs of stabilization. incoming economic data over the last couple of weeks suggest that global economic activity is improving. the economic rebound in the coming months may even exceed expectations. at the same time, looking beyond the near term horizon, our economies and the financial system continue to face considerable uncertainties and challenges. yet, certain parts of the financial industry appear tempted to go back to business as usual. industry statements and comments made by some banks on regulatory reforms reflect this trend. ladies and gentlemen, i am deeply convinced that it is our common responsibility and duty not to let this happen. let me begin by laying out three hopefully compelling reasons why we must secure fundamental regulatory reform of the financial sector. the first reason is that too much of the risk taken in the financial sector ultimately resides