This is the case even if the provider of funds believes that the borrower would remain solvent as long as it retained access to funding on normal terms. The cost of running when it turns out to be unnecessary is small relative to the cost of not running when it turns out to be prudent. Of course, this insight is not a new one. Prior to the establishment of a lender of last resort and retail deposit insurance for banks – which came with the quid pro quo of prudential regulation – bank runs were a regular and disruptive feature of our financial system. These innovations solved the coordination problem and stabilized this source of funding. What was new prior to the crisis was the extent to which maturity transformation and financial intermediation had migrated outside of commercial banks. The growth of what we call the shadow banking system occurred largely without the types of safeguards – robust prudential regulation, deposit insurance, lender of last resort – that have safeguarded the commercial banking system from the types of widespread panics and runs that are capable of destabilizing the financial system. The systemic risk created by this gap in coverage was not well recognized by regulators or the private sector prior to the global financial crisis.
Unlike organised exchanges, OTC markets are subject to little, if any, transparency or regulatory requirements, raising the risk of price ramping, collusion and other misconduct. International Financial Architecture: International Co-operation for Reform So what can be done about all this? Following the outbreak of the financial crisis, various international forums and multilateral financial institutions have devoted a great deal of effort to improving the stability and functioning of financial markets. Working group after working group has been formed to look into specific issues. There were the three G-22 working groups, the working BIS Review 47/1999  4  group under the Basle Committee on Banking Supervision, the two transparency and disclosure working groups under the Committee on Global Financial Systems, and now the three working groups of the G-7 Financial Stability Forum to be formed. And I should not forget the very useful work done by the IIF, and by other forums in this region. Many helpful reports have been prepared, including the two reports by the IIF released in March this year on risk management and on transparency in emerging markets finance, all of them produced in a highly co-operative atmosphere. I welcome in particular the Institute’s readiness to work with relevant public sector bodies on appropriate disclosure for private financial institutions active in the international capital markets. I am sure this international co-operative spirit, not only among international financial institutions, national finance ministries and central banks, but also with the private sector, will in the end produce helpful blueprints for action.