Yet they all failed to some degree to prevent the accumulation of risks that finally produced the crisis. So it is unlikely that there is a simple answer. Any plan for reform should take into account the nature of financial risk. Why were so many people misled for so long? And was there an inherent weakness in the structure of modern banking? Banks are dangerous institutions. They borrow short and lend long. They create liabilities which promise to be liquid and hold few liquid assets themselves. That though is hugely  BIS Review 32/2009  1  valuable for the rest of the economy. Household savings can be channelled to finance illiquid investment projects while providing access to liquidity for those savers who may need it. But given how risky banks are, it should not be surprising that from time to time they get into trouble. And they have done so regularly since banking began. Confidence in a bank can disappear quickly making it vulnerable to a destructive bank run. If a large number of depositors want liquidity at the same time, banks are forced into early liquidation of assets – lowering their value. And, of course, if banks make sufficient unwise loans to borrowers who do not repay, then that can threaten solvency as well. Banks can of course take their own actions to ensure that investor confidence is maintained. For example, a visible source of liquidity helps.
Part 3 At this point, allow me to offer some reflections on the changing economic and financial landscape for internationally active financial institutions. Asia is host to a diverse group of foreign financial institutions, many of which have a long history and entrenched presence in the region, with strong roots in our local economies. For the most part, these institutions have made important contributions to the development of domestic financial systems and economies. This includes meeting the demands for financial services in areas not being extensively served by the domestic financial system. While the international policy response to the global financial crisis has been extensive and on an unprecedented scale, an area that has not been as extensive is the cross-border dimension of policy making. More specifically, the global financial crisis has highlighted the gaps in the international framework for the regulation and supervision of the cross-border activities of financial institutions. This has generated renewed concerns on the extent to which external shocks might be transmitted to the domestic economies as a result of the presence of such international foreign financial institutions. As part of the international regulatory reforms, significant progress has been made to ensure that systemically important financial institutions have a higher degree of resilience and stronger incentives to reduce their systemic risks over time. This includes through the holding of higher capital, and requirements for all global SIFIs (systemically important financial institutions) to develop recovery and resolution plans.