The recent recession has been accompanied by very low interest rates, which have kept loan losses down, but this may or may not be the picture in the future. It would be unwise to bet on it happening, and particularly when we know that loan forbearance is quite widespread. The fourth thing that supervisors have done is to apply judgement in overlaying the Pillar 1 modelled capital requirements with Pillar 2 capital buffers. Since 2008, required Pillar 1 capital in the major UK banks has increased from £ to £ Pillar 2 capital buffers set by the FSA, in all, have increased during the same period from just under £ to £ Put simply, in the regime up to 2008, there was no judgemental overlay of capital buffers, now there is such a buffer. This is a product of good judgemental supervision. 2  BIS central bankers’ speeches  What is the role of a leverage ratio? For me, it is not the frontline tool, but rather the very useful back-up check. Why is it not in the frontline? Because it would not on its own prevent the two main causes of the crisis. First, savvy investment bankers would take assets off balance sheet into places where a leverage ratio may not be the best measure. And second, on its own it does not stop the arbitrage whereby the riskiness of each unit of assets rises as a means to circumvent the discipline of the leverage ratio.
The ECB’s Governing Council does not consider that appropriate. The governments themselves have several means to leverage the EFSF. Yet again the banks are deeply in crisis and clearly need to be recapitalised. Can the euro area afford another banking crisis? We have to deal with the sovereign risk tensions and we have to deal with the banking tensions. It is crucial that the banks put their balance sheets in order as quickly as possible. They need to build up a stronger equity position by retaining profits and being less generous with bonus payments. In so far as is possible, they must recapitalise in the market. If a financial institution has no access to the capital markets, the Government must stand ready to recapitalise solvent banks. In addition, where it would be necessary, the Heads of Government have decided that the EFSF can be mobilised to recapitalise banks. How can it be prevented in future that taxpayers have to continuously save the banks? The global financial system must be much more resilient. That is the reason why we have to apply rigorously and fully the new Basel III rules, to be sure that systemically important financial institutions do not put the sector in danger. In this regard we have to be inflexible and oppose any pressure group. Under your leadership, the ECB has risen to become Europe’s secret government. Is it not deeply undemocratic when representatives of an unelected institution like the ECB can dictate austerity plans to an elected government like Italy’s?