We can also expect some progress with regard to transparency when Basel II comes into force in Europe at the beginning of next year. The third pillar of this new framework addresses the issue of improving market discipline through public disclosure. Furthermore, we need transparency and reliability with regard to valuations of financial instruments.
In the recent turmoil, the valuation of credit instruments – especially those that are backed by subprime loans – in financial institutions’ balance sheets has raised considerable attention and contributed to uncertainty. Pricing structured financial instruments mark-to-market is extremely difficult in times when markets have dried up. Therefore the mark-to-model method is increasingly being used.