In general terms, there are two ways to address ex ante the problems that SIFIs pose: you can restrict the scope of their activities or force them to internalise the costs they pose to the system. The clearest illustration of the first approach is the discussion on the “Volcker rule” in the United States. Under this rule, banks that receive deposits would be prevented from engaging in proprietary trading, and investing in or sponsoring hedge funds and private equity funds. I do not believe this is the most fruitful way to pursue in Europe, given the traditional strength of the universal banking model in a number of Member States. Also, there may be challenges associated with defining the borderline between the proprietary trading and servicing clients. But more importantly, the activities that are seen as deserving special attention may move outside the intensively regulated and supervised banking business, but stay within the same group. One could argue that the same effect of controlling for risks stemming from the trading business can be reached by imposing higher capital requirements on banks’ trading book activities, and this seems to be the way that is being pursued internationally. The Basel Committee has already increased the capital requirements for a number of trading book activities, and a fundamental review of the trading book is planned for next year. The Basel Committee is looking as well into how to get the SIFIs to internalise the potential costs they pose to the financial system.
Then I will turn to four eye-catching initiatives:   first, the establishment of the European Systemic Risk Board or ESRB, a new body that will for the first time become responsible for macro-prudential supervision in the EU;    second, how policy makers are dealing with systemically important institutions;    third, the issue of procyclicality or the dynamic interplay between the financial sector and the real economy;    fourth and last topic to which I will pay some more attention is the mandate of central banks in the area of financial stability. Let us now embark on our architectural walk! II. Causes of the current crisis  Much has been said about the root causes of the current crisis over the past three years. I will not expand on this topic but I will just mention specific factors – some of them of a macroand others of a micro-economic nature – which in my view were key in the run up to the crisis. In the two or three years before the crisis erupted, a constellation of factors, including very favourable macro-financial conditions combined with strong growth, low inflation, ample liquidity, exceptionally low volatility across virtually all financial markets and extraordinarily low risk premia, had the effect of covering up the building up of significant imbalances. Significant financial imbalances were in the making, at various levels of the global economy and financial system.