Thankfully, all this is now also being worked on internationally in the Financial Stability Board. A second and obvious policy inference that one could draw from Shleifer’s paper, and one I want to spend a little more time on this evening, is that it is absolutely vital that (regulatory) capital requirements for banks more or less truly capture their risks. Two thoughts on that, of rather different kinds. First, it was very obviously a false step when, in Basel 2, the international-standard setters tried to follow the techniques and calibrations of private sector risk managers rather than engaging with the externalities that warrant State intervention in this area in the first place. Second, more particularly and more concretely, this underlines the vital importance of the current Basel work to review fundamentally the capital requirements for banks’ trading books. In short, Basel has recognised that the amount of capital a bank should hold against a liquid trading position often has good reason to be smaller than needed for a hold-to-maturity portfolio, ie where the bank can shed its exposure. But it failed utterly to recognise that since such books are marked-to-market (or model) and since the boundary conditions for solvency derive partly from accounting measures of asset values, it is vital that banks hold capital against the risk of violent swings in liquidity premia. Yet that is exactly what torpedoed a fair fraction of the largest banks and dealers in the world through their (levered) holdings of leveraged loans and super senior tranches of CDOs.
Peter Praet: Economic adjustment in the euro area Speech by Mr Peter Praet, Member of the Executive Board of the European Central Bank, at the Institutional Money Congress 2013, Frankfurt am Main, 27 February 2013. *  *  *  I would like to thank Arthur Saint-Guilhem, Melanie Ward-Warmedinger and Niels Bünemann for their contribution to the preparation of this speech. Ladies and Gentlemen, Introduction  Thank you for inviting me to share some thoughts with you on what has been achieved and what remains to be done in the process of addressing the economic challenges we are faced with in the euro area. I will give you a central banker’s view on the role of monetary policy in managing the current crisis, but I will also extend my discourse to cover the broader institutional landscape, including some thoughts on what policy-makers in other fields than monetary policy could contribute to improve the euro area’s resilience. Today, I will focus on three points: First, the European Central Bank – together with the national central banks of the Eurosystem – has acted forcefully within its mandate, in order to counteract any risks to price stability stemming from the crisis. The ECB’s monetary policy during the crisis has invoked both standard instruments such as interest rate changes and non-standard instruments to ensure that the standard instruments would have the intended effects. Second, the most distressed countries within the euro area have embarked on a correction of their policies.