Let me start by thanking our Korean hosts and the Financial Stability Board for organising this conference. The timing could not have been better as the Basel Committee has entered the final phase of completing its reform programme. It is especially fitting that this meeting is hosted by the Republic of Korea, given the importance and continuing growth of the South Korean economy, its membership on the Basel Committee, and of course its key role as current chair of the G20. As you know, the Basel Committee’s reform programme will be presented to the G20 leaders for their endorsement when they meet here in November.
A number of commentators have questioned whether the Basel Committee’s reforms of global banking standards are really necessary for countries that neither “caused” the crisis nor were directly affected by it. However, I should point out that all were affected indirectly through the global economic downturn. This includes emerging market economies.
To me, at least, it is clear that we all have a lot to learn from both the recent and past financial crises. History has shown that crises have emanated from all regions of the world and have a range of causes. None of us knows what will be the source of the next crisis. What we do know, however, is that in a dynamic, ever changing global economy, there will be future crises and that it will be hard to predict them in advance. Moreover, as banks are at the centre of the credit intermediation process, it comes as no surprise that the deepest and most prolonged downturns occur when the banking sector ceases to perform its central role in the economy. We therefore must increase the resilience of the banking system to financial and economic shocks, in particular through higher capital and liquidity buffers, but also through a more resilient infrastructure. We also must change incentives in areas such as governance practices, compensation and the moral hazard associated with too-big-to-fail institutions. This is the best form of preparation and will contribute to increasing our long term growth and welfare.
The reforms of the Basel Committee are intended to address these identified shortcomings by promoting a more resilient banking sector that can support more sustainable growth over the long run. Let me elaborate on our reform programme, which is nearing its final stage of completion. My focus will be on strengthening the global capital framework and introducing a global standard for liquidity.