By forcing all of the banks that participated in the SCAP to have sufficient capital to help them withstand a stress environment, this process improved confidence and increased the willingness of banks to engage with each other. It also made it easier for the banks to be able to tap the capital markets. The SCAP exercise made a bad state of the world less likely, helping to create a virtuous circle rather than a vicious one. The SCAP exercise was developed and conducted in response to the crisis and a specific need. Now, we need to figure out how to conduct these types of exercises on a systematic basis. Such exercises may even need to be hardwired into the supervisory oversight of the financial system. Transparency In some critical segments of our financial markets, both before and during the crisis, limited or ineffective disclosure undermined market discipline and this contributed to the accumulation of risk. In the years leading up to the crisis, the lack of transparency contributed to increased risk and leverage in off-balance sheet vehicles, structured credit products and in over-the-counter securities such as asset-backed securities (ABS), commercial mortgage-backed securities (CMBS), residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) and their associated derivatives. Once the crisis was underway, the opacity of many of these vehicles, structures and securities contributed to the concerns about counterparty credit risk. This uncertainty exacerbated the erosion in market liquidity conditions and further intensified the crisis.
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