Interconnectedness This financial crisis has exposed how important the interconnections are among the banking system, capital markets, and payment and settlement systems. For example, the recent disruption in the functioning of the securitization markets caused by the poor performance of highly-rated debt securities, led to significant problems for major financial institutions. Banks had to take assets back on their books; backstop lines of credit were triggered; and banks could no longer securitize loans, increasing the pressure on their balance sheets. This  BIS Review 125/2009  1  reduced credit availability, which increased the downward pressure on economic activity, which caused asset values to decline further, increasing the degree of stress in the financial system. This interconnectedness implies that regulation and risk management practices that focus only on individual parts of the system will inevitably fail to address important vulnerabilities elsewhere. Thus, we have to make widespread changes in how we approach supervision and regulation, particularly in the context of our most systemically important financial institutions. First, although supervision cannot lose its vertical perspective, looking firm by firm or region by region, it also must place more emphasis than before on gaining a horizontal perspective – looking broadly across banks, securities firms and other types of financial institutions, and across markets and geographies. Second, the supervision of our financial institutions and the regulation of markets need to be risk focused, coordinated and multi-disciplinary.
For example, multi-year guaranteed bonus payments would raise a red flag for us as not likely being consistent with the evolving consensus on sound compensation practices. Thank you for your kind attention. I would be happy to take a few questions. 8  BIS Review 125/2009