During the turbulence of autumn 2008 the German deposit guarantee arrangements were a decisive factor for maintaining confidence. Again demonstrating what this system is capable of in an exceptionally critical situation. Any measure should be strictly rejected which could endanger the existence of the German deposit guarantee arrangements, possibly weakens the depositors’ confidence in the security and functioning of the existing systems or lowers the existing level of protection. If at all, only banks that are actually internationally active should be included in the scope of any pan-European system. The contributions must be graded according to the risks on the balance sheet. Voluntary institute-specific systems offering a greater degree of protection must remain permissible. 2.3 Raise capital adequacy requirements, but in line with risk A central point of criticism of the current capital adequacy requirements is that they act cyclically and thus have no stabilising effect on either the banking sector or business financing. The rules allow the institutes to reduce their capital backing or expand their business in good economic times but force them to increase their capital backing or contract their business when risks appear. Dynamic value adjustment to cushion expected losses – as already practised in Spain – or dynamic equity cushions to cover unexpected losses represent two possible ways forward. However, prior to their implementation it would be important to thoroughly investigate the quantitative effects of such cushions. The current accounting rules have also contributed to the occurrence of equity shortages. Growth in market value can be entered in the books and paid out, leaving no cushion to cope with any subsequent fall in market value. In future it will be necessary to put clear limits on the risks posed by system-relevant banks. Larger equity reserves are certainly one element. Simply raising the capital adequacy requirements across the board would not be very helpful; it would restrict the banks’ ability to lend without actually tackling the systemic risks. Instead, higher capital adequacy requirements should be applied especially for high-risk derivatives. No additional stability is gained by redefining equity in Anglo-Saxon terms(i.e. only subscribed voting shares and open reserves). There are no objective grounds for placing such a restriction on the definition of core capital, because the capital instruments concerned share possible losses just like equity and therefore possess equity qualities. Efforts to artificially define core capital more narrowly(for example largely excluding capital contributions of dormant partners) therefore point in the wrong direction. 2.4 Set the right incentives in the banking sector The first and central point is for minimum standards to be observed in lending. These include careful scrutiny of creditworthiness, solid loan-to-value ratios, emphasis on long-term financing and a requirement that the borrower contribute equity of his own. Securitisation is a fundamentally useful financial instrument that allows banks to control their credit portfolio and gain leeway for more lending. But it is important to impose a greater degree of responsibility on the vendors of structured securities through compulsory self­retention. Also, the investor must be clearly informed of the ultimate purpose of the securitisation. Whether the proposed self-retention of 5 percent will suffice to bring about responsible use of securitisation remains to be seen. A higher self-retention rate would certainly have done more to stem the risks of lax lending under the originate-to-distribute model. The way existing bonus structures largely reward short-term risk has contributed to destabilisation of the financial system. Remuneration structures should not offer incentives for 5