Two years into the financial crisis, the longer-term repercussions for the global financial system are becoming more discernible. Progress is being made on the implementation of the Group of 20 action plan and we must not let up in our efforts. Industry as well as political leaders must ensure that arrangements found deficient, instruments found wanting and industry practices found inappropriate are not re-established. It is equally important that the cumulative effect of the various proposals is kept under consideration. For instance, a number of regulatory changes will lead to higher capital requirements, and care should be taken that the aggregate effect does not exceed levels deemed sufficient in the interest of an appropriate balance between stability and the ability of the financial system to raise the funds necessary for global growth.

It is also vital to maintain an internationally harmonised approach. There is a danger that changes in the regulatory environment will, by accident or design, lead to a refragmentation of markets. It is understandable that national regulators and governments, chastened by the experience of having to clean up after banking failures, try to limit the potential costs to their jurisdictions. But the proposal that large, internationally active financial institutions should essentially be reduced to holding companies of national operations that are organised as stand-alone units is not the right answer.

In fact, such a structure would enhance rather than reduce risks to financial stability, as it would create trapped pools of liquidity and capital. Banks would not be able to manage their risk, capital and liquidity on a consolidated basis. This would make the allocation of capital in the economy less efficient in normal times and render an efficient response more difficult in times of tension. It would also have severe implications for the growth prospects of smaller countries with a limited deposit base.