This heightened uncertainty suggests that in maintaining their capital buffers – the dikes – banks need to do a better job capturing the risks related to this business model. We have to build higher dikes but must not forget the importance of building on a sound foundation, which is high quality capital. Basel II provides the necessary framework within which to achieve these enhancements.
I will return to the capital issue in a moment. Liquidity Liquidity was another victim of the current storm and its demise holds valuable lessons for supervisors. Increasing banks' liquidity cushions and improving liquidity risk management and supervision has been an area of sharp focus for the Committee.