The question we need to ask is how those two characteristics relate to each other. In other words, what is the link between liquidity and risk? Here we could use a very simple framework. Investors have a perception that a market is liquid if they feel they can trade their assets (and positions) with no constraints and without moving prices by too wide a margin. BIS Review 128/2007  1  Liquidity exists when there are counterparties available to trade at any moment in time. It follows that liquidity is both an expression and a consequence of the ability of market participants to take risks on each other. For liquidity to exist, therefore, there must be a general sense, in the market, that each participant (or, at least, most of them) are suitably equipped to face the risks they are taking. This is what we call confidence. Looking at discussions on the current phase of market turmoil, two views have emerged as to what determines confidence. The first view emphasizes information and transparency. Crisis of confidence and drying up of liquidity occur when there is too much opacity in the system, when investors are unable to assess risks, or when market participants do not trust whatever information is available. One good example is valuation. Valuation of complex instruments is currently at the forefront of discussions between regulators, market participants and investors.
This clearly reflects the IMF’s commitment to reforming its assistance and solidarity framework to help the most vulnerable countries. Similarly, the adequacy of the resources of multilateral development banks was reviewed and, for example, the capital of the Asian Development Bank was tripled. In order to enhance the legitimacy and efficiency of key players in the international financial architecture, the bolstering of resources must go hand in hand with a reform of their governance. As a European, I am perhaps not the best person to give my views on the governance of financial institutions, and of the IMF in particular because, for emerging countries to be given a fair representation, it is most often the representation of European countries that is called into question. You may therefore be tempted to interpret my suggestions negatively. I would, however, first like to say that the representation of European countries should not be contested: Europe is a diverse continent that encompasses small, new, and even emerging countries alongside large and established developed nations. Overall, it is somewhat under-represented in a community that is still made up of sovereign states.