I turn now to a very important response in Europe to the crisis, which is of particular interest for the ECB: the establishment of the European Systemic Risk Board or ESRB. This new body will be responsible for macro-prudential supervision in the whole EU. In contrast to micro-prudential supervision, which focuses on the financial soundness of individual institutions, macro-prudential supervision looks at the financial system as a whole. Up to the late 1990s, the predominant view of policy makers was that if individual institutions were financially sound, the financial system as a whole would also be fine. Unfortunately, this is not always the case. Through various channels, institutions can be inter-linked so that problems emerging from one or some of them may spill over to the rest of the financial sector, setting in motion an adverse dynamic that affects all of them. A macro-prudential perspective, looking beyond the conditions of each institution in isolation, should help to detect and prevent such system-wide potential problems. Of course, there were already in place mechanisms for the monitoring and assessment of financial stability well before the financial crisis erupted, as evidenced by the financial stability reports published by the various central banks. But the financial crisis also demonstrated fundamental weaknesses in practices:  BIS Review 87/2010  3    First, while various central banks engaged in their own financial stability analysis there was not really a comprehensive analysis covering the whole EU and all elements of the financial system.
This reform agenda is very ambitious and time-wise rather tight, but before describing the measures under discussion, let me first briefly introduce the main actors in this area. The G20 provides the political and strategic impetus for the reforms, with the Financial Stability Board (FSB) playing an important role in the policy coordination. Various committees and working groups, of which the most prominent is the Basel Committee on Banking Supervision, are charged with reviewing specific international standards. As regards the reform agenda, the most important issues are the following:   the adoption of high-quality capital and liquidity standards for banks,    measures to reduce the financial system’s procyclicality,    the introduction of a regulatory framework for systemically important financial institutions,    the regulation of credit rating agencies and hedge funds, improving OTC derivatives markets, and    finally, sound compensation practices that support financial stability. These issues are comprehensively addressed by the Basel Committee’s reform package that aims to strengthening the banking sector’s resilience and represents a cornerstone of the response to the crisis. The package, which was released at the end of last year for consultation, aims at improving the quality and consistency of bank capital. It also considers the introduction of a non-risk-based leverage ratio as a supplementary capital measure. This leverage ratio is expected to curb excessive balance sheet growth and to set a floor for the Basel II capital requirements.