itself and deployed to increase secondary market activities, in particular proprietary trading. over the last few years the crisis has heightened appreciation of the benefits of a more stringent regulatory regime. and much has been done to remedy the shortcomings of financial systems. at the international level, under the political impulse of the g - 20, the financial stability board and the basel committee on banking supervision introduced substantial regulatory changes to reduce the frequency of financial crises and increase the resilience of economic systems. improvements have been introduced in many areas such as bank capital and liquidity, otc market infrastructure, and compensation policies in finance ; importantly, new macro - prudential authorities have been established in many countries. but the regulatory overhaul has not yet been completed. several issues are still being actively discussed, such as the role of rating agencies and accounting standards. although new regulations on systemically important financial institutions have recently been approved, the “ too - big - to - fail ” issue is still a major concern. it would be foolish to pretend that defaults can be avoided, so we need to be prepared for their occurrence. the ongoing work on resolution regimes is a promising approach in this regard. rules alone are not enough, however. allow me to mention a few scattered areas from which progress should be expected : ● one element that is essential for guaranteeing systemic stability is the method of measuring risk - weighted assets ( rwa ), the denominator of capital adequacy ratios. rwa measures have recently attracted increasing attention from market analysts, banks and supervisory authorities. it has been argued that the methodologies for computing rwa may not be comparable across institutions and, especially, across jurisdictions, and that they should more properly reflect risk in order to avoid ultimately jeopardising financial stability. these problems highlight the relevance of supervisory practices in determining banks ’ capital requirements ( for example, in validating internal banks ’ models for calculating risk weights ). here, rigorous microprudential supervision is essential. we really need to work out a single rulebook, to move with determination towards taking joint responsibility and using peer reviews as much as possible in our supervisory activity. the watchword can only be : “ more and better supervision ”. ● furthermore, in today ’ s globalised world, it is crucial to make sure that countries cooperate and agree on the appropriate stringency of financial regulation. countries should not compete by relaxing rules in order to attract financial intermediaries, as this may generate negative externalities

enabling investors to transfer resources efficiently across time, space and states of the world. but this idea relied on the presumption that the world is basically stationary ( and substantially linear ), that the future is pretty much like the past, that we can extrapolate from relatively small samples, and that there is a single “ data generating process ” that we can identify and understand. ( we must admit that all this is not limited to finance but also applies more broadly to macroeconomics, econometric modelling and forecasting. ) the real world is different, though ; for many years the big investment banks were able to sustain returns much higher than what was justified by economic growth, but the day of reckoning was bound to come. in a way, innovation, based on the presumption of stationarity, sows the seeds of the non - stationarity that eventually undermines that very presumption. ● complexity was also used, somewhat perversely, as part of the case for a sort of benign neglect on the part of regulators. the big financial players argued successfully that financial innovation was too complex and too opaque for the regulators to get their heads around it. indeed, they said, to safeguard the international financial system from systemic risk, the main priority was promoting an “ industry - led ” effort to improve internal risk management and related systems. this, in a nutshell, was the view espoused by the group of thirty report following the outbreak of the asian crisis ( “ global institutions, national supervision and systemic risk ”, group of thirty, 1997. see also the article by john heimann, and comments therein, in the special issue of the banca nazionale del lavoro quarterly review on “ globalization and stable markets ”, march 1998 ). but this thesis was often accompanied by the argument to the effect that “ you, regulators and supervisors, will always be behind financial innovation ; it would be better to allow us, the big financial international players, to self - regulate ; we are grownups, we can take care of ourselves ”. and, after all, “ if someone makes mistakes, some will gain what others lose ; why can ’ t we be left alone to play this zero - sum game of ours? ” accepting this argument was a critical mistake. the regulators did not, in fact, have either the right incentives or the ability to acquire the necessary information, for two reasons. first, the big financial players are global