Another important element of the Basel reform package is the introduction of a range of measures designed to mitigate the inherent pro-cyclicality of the financial system. In this context, mechanisms that enhance prudent and forward-looking provisioning of banks as well as the building up of sufficient capital buffers in years of economic expansion that can be drawn down at times of stress, are all under consideration. Overall, these measures aim at ensuring that the financial system functions as an absorber, rather than an amplifier of shocks, thus smoothing the volatility of the financial and real economic cycles. In setting up a more forward-looking provisioning framework, the Basel Committee works closely together with the accounting standard setters with a view to developing a sound operational framework for expected loss provisioning. In this context, let me mention as very important the collaborative efforts under way between the Basel Committee and the IASB to develop a revised expected loss model that proves operational. Concerning measures on capital buffers, the Basel Committee set forth a proposal on a capital conservation buffer that would establish certain restrictions for undercapitalised banks with regard to the distribution of earnings in the form of dividends, share buy backs and bonuses. In addition, the introduction of a counter-cyclical buffering mechanism is also considered. It would require banks to build up additional capital buffers when excessive credit growth is identified in the economy. The last topic I want to pay some attention to is the role of central banks in financial stability.
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.