The road to a more resilient banking sector

Banks are making gradual progress in recovering from the crisis. Further solidifying the resilience of financial institutions requires that they maintain ample, high-quality capital buffers to absorb losses plus well managed liquidity buffers that will protect them against sudden collapses in market confidence. And it requires improvements in resolution regimes that will allow systemically important institutions to fail in an orderly way.

However, measuring and managing the risks of the increasingly international and intricate financial system continues to challenge the prudential framework. Here, the use of risk-sensitive metrics together with simple balance sheet gauges can play a key role in controlling financial system risk. In combination, these two types of measures are mutually reinforcing and thus generate more information on the riskiness of a bank than does either of them alone. Policies to structurally separate bank functions may also help reduce complexity at the level of the firm, but their impact on systemic stability and efficiency is an open question.