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Financial regulators around the world are engaged in a historic and sweeping renovation of the global financial architecture. The scope of this global regulatory project is enormous, and I will touch on only a few of its elements. One of the most important goals is to ensure that banks have adequate capital to withstand severe financial stress. I am pleased that, just this morning, the Federal Reserve Board finalised the Basel III capital requirements for bank holding companies and Federal Reserve state-chartered member banks. The other US bank regulatory agencies are on track to adopt the same set of rules for the institutions they regulate over the next week or so. The Basel III capital reforms will substantially improve the resiliency of global banks and will serve as the cornerstone of the global regulatory effort to safeguard the stability of the world’s financial system.
Both in the United States and in Europe, some parts of the reform agenda will take longer to complete. For example, I note the ongoing progress towards achieving one of the most ambitious and important regulatory goals: the creation of a European banking union. It is clear that this challenging project will be the work of many years; indeed, it is not for an American to educate Europeans on the challenges of international cooperation. But the importance of this project for Europe’s future is equally clear. The recent agreement on harmonising national resolution regimes is an important achievement, and a milestone on the road to longer-term goals such as a single, centralised resolution authority.
Perhaps the greatest challenge for the resolution of a systemic global bank is the possibility that public or private actors in different countries might take local actions that would cause the overall resolution to spin out of control. Creditors and counterparties of solvent operating subsidiaries might rush for the exit if they are unsure of their status. As a subsidiary comes under increasing stress, authorities might pre-emptively ring-fence local assets. The process of resolution will need to be fully worked out and understood beforehand by market participants, regulatory authorities, and the general public. It will be absolutely essential to build trust among all parties, and especially between regulatory authorities.
The international effort to strengthen financial regulation cannot succeed unless each nation understands the goals and challenges faced by its partners. The Federal Reserve and the Bundesbank have a long history. I believe there is a trust between us that is the basis for collaboration. I look forward to working with you to make the financial system safer and stronger.