Transparency may be reduced if it is unclear why supervisors set certain requirements for one bank, and a different requirement for another. Allowing a discretionary approach in the absence of the other pillars also makes it difficult to ensure a level playing field, since banks would not necessarily be held to the same standards. That would certainly harm competitiveness across jurisdictions, and possibly even within the same jurisdiction. So the third pillar, market discipline, adds greater transparency. When a bank discloses information that offers meaningful insight into its risk positions and exposures, marketplace participants can better assess the financial health of the institution. They can then provide economic incentives for banks to strengthen their management of risk and hold realistic levels of capital against their risks. One might say that Basel II seeks an “efficient frontier” of policy objectives through the three pillars. Each pillar provides something that the other two cannot, and each is essential to achieving our overall objective of financial stability. I realise that this analogy of the three pillars as a portfolio of policy options is an oversimplification. But it helps us visualise why we think that the most “efficient frontier” involves a mixture of minimum rules, tempered by supervisory discretion, and supplemented by market-based incentives. IV. Consistency of accounting standards and Basel II  Of course, it would be impossible to improve transparency and promote stability without examining the mechanics that define how financial data are recorded and reported.
In any case, whatever the financial  2  BIS Review 48/2009  outcome, it must be borne in mind that the only motive behind our intervention was to keep the uncertainty with regard to the value of UBS’s illiquid assets from destabilising the bank and thereby our financial system and economy. When public funds are employed to restore financial stability, the rules governing the functioning of markets need to be adapted to ensure that such a situation can never arise again. We therefore strongly supported the SFBC’s stance in favour of a gradual strengthening of the big banks’ capital levels, of capping their leverage ratios and reforming their compensation systems. In addition, the SNB is currently working together with FINMA to impose more stringent liquidity requirements. As I already pointed out last year, a small country like ours is entitled to define specific conditions under which the systemic risks involved with having two large international banks domiciled on its territory must be limited. The Federal Council and the SFBC clearly recognised this situation and took appropriate preventive measures. For the future, it would also be advisable to examine the expediency of putting into place a legal framework and organisational measures that permit an orderly liquidation of systemically important banks. The crisis spreads to the real economy Ultimately, it was inevitable that the financial market crisis would spread to the real economy. And yet the year 2008 began well.