The supervisory authorities can help remedy this by ensuring that banks’ assessment of risk in internal models is based on data from at least on complete business cycle. The supervisory authorities also have the possibility of imposing an extra capital requirement on a bank if the bank has large risk exposures. Banks must therefore perform stress tests to demonstrate that they have sufficient capital to weather a downturn. Regulatory changes can probably reduce fluctuations in banks’ eagerness to lend. Banks could be required to accumulate additional reserves. One example is that in a favourable economic situation banks could be required to make additional provisions for future losses, as is the case in Spain. 9 Another proposal 10 is that the capital requirement should be raised when lending growth increases. Banks may be forced to sell large volumes of assets in a crisis situation. Three US academics 11 have recently proposed a supplement to the capital requirements in order to reduce this selling pressure. They propose that banks acquire a form of insurance that is paid out when the banking sector as a whole has losses over a certain level. When a crisis occurs, banks will then be assured of a supply of fresh capital. Foreign-owned branches and subsidiaries have a market share in Norway of close to 35 per cent in terms of total assets. Most of them are chartered in the other Nordic countries.
For instance, with this crisis, we witness a breakdown in the key assumptions that form the basis of our thinking about the efficiency and the self-correcting nature of markets which, for a long time, underpin the rationale for globalization, liberalization, and deregulation. These assumptions are now being challenged. Next, in this crisis, the most damage comes from the most regulated sector of the economy, notably the financial sector. What we saw is that, even with regulation in place, the sector surprisingly exhibited important failure in risk management discipline across a variety of institutions and players, including banks, institutional investors, credit-rating agencies, and regulators. On this, a better way to manage risk to support the process of international financial intermediation still needs to be worked out. And finally, the global economy has never before been put in a position that it might have to deal with the consequences of the  BIS Review 92/2009  1  massive policy response that have been put in place both on the fiscal and the monetary fronts. These 4 consequences are the known unknowns, and the approach we choose to address them will importantly influence the direction that global finance will take going forward. Given the focus of this conference is on the stake of emerging economies in the international financial system, let me share with you briefly how emerging economies in Asia so far have managed in the current crisis, and how we see the direction of global finance evolving.