This morning, I will do two things: •  First, take stock of the progress in making the global banking system safer. •  Second, highlight how we can ensure that banks continue to serve the needs of the real economy as we press ahead with the regulatory reform agenda. Progress in Making Banks Safer Let me start with the progress in regulatory reforms and their effectiveness. Key Regulatory Reforms are in Place Since the global financial crisis, regulators have put in place reforms to strengthen banking resilience and financial stability. There has been good progress in three key areas. First, capital. Basel III imposes more stringent capital requirements and larger buffers to cushion against losses. •  Capital requirements have been enhanced for specific exposures, including market risk, complex securitisation, and counterparty credit risk, all of which were major sources of losses in the crisis. Second, liquidity. Rules have been introduced to strengthen banks’ liquidity risk profiles and promote funding stability. Third, addressing the “too-big-to-fail” problem. •  Regulators have established frameworks: − first, to identify Global Systemically Important Banks (G-SIBs); and  BIS central bankers’ speeches  1  − second, to subject them to more intensive supervision, higher capital requirements, and resolution planning requirements. •  The Financial Stability Board (FSB) has set out key attributes for effective resolution, including the preparation of recovery and resolution plans for systemically important financial institutions.
Situations remain very diverse among advanced economies: while the balance sheet of the Bank of Canada amounts to 5% of its nation’s GDP, the Swiss National Bank holds assets equivalent to 80% of the Swiss GDP. Discretionary and technical factors both explain those differences and evolutions. The former holds for countries that choose to accumulate foreign exchange reserves. The latter is topical in the case of the euro area: the ECB’s balance sheet performs an intermediation function between National Central Banks through the so-called Target 2 system. So, as a mechanical phenomenon, balances in the system tend to grow in times of market segmentation i.e. an impaired interbank market and strong capital flows inside the euro area. Similarly, conducting monetary operations via open market or via repos makes the size of the balance sheet more or less dependent on the size of the interbank market. However, the recent increase in size mainly results from a shift in the monetary policy regime. Central Banks have taken a proactive – rather than purely passive – approach to their balance sheets. They have, according to the common parlance, “put these balance sheets to work”. And, as a result, in the formulation of monetary policy, “quantities” – the amounts of assets and liabilities – have come to play an increasing role as compared to “prices” – the level of interest rates. This, of course, is a component and a consequence of unconventional monetary policies.