The institutions exposed to them and the amount of their exposure were unknown. Liquidity dried up and many banks experienced very heavy losses. These increased when off-balance-sheet transactions had to be returned to the books. The bankruptcy of Lehman Brothers in September 2008 was the trigger that brought the international financial system to the verge of collapse and marked the end of this period. Consequently, the authorities had to rescue the largest banks. This phase left us with a legacy of profound risk aversion which will take a long time to fade. Throughout 2009, the second phase of the financial crisis interacted with a sharp decline in global economic activity. Corporations and households experienced a loss of wealth which, in turn, weakened the quality of assets on banks’ balance sheets. The third and most recent phase of the crisis, which particularly affects Europe, has unfolded throughout 2010. It stems from the rapid deterioration of public finances in a climate in which markets are reluctant to keep financing increases in public debt that they consider may run into problems of sustainability. Simply put, this deterioration is explained by the loss of momentum of the European economy, the attempts of public authorities to alleviate its most painful effects on society and the consequences of States’ efforts to avoid the collapse of the financial system. How have these three successive phases affected the Spanish banking system? Spanish banks held up reasonably well in the first phase of the crisis.
The U.S. was not alone in this shortcoming, but given our position in the global financial system, we especially should have done better. We’ve taken important steps through new legislative mandates and a broader effort to rethink our regulatory and supervisory framework. In particular, systemically important banking organizations must now hold amounts of capital and liquidity that are better aligned with their risk profiles. Other changes have also been implemented, such as central clearing of standardized OTC derivatives contracts, that should make the global financial system more resilient and robust. Although this effort remains very much a work in progress, I think it will enable us to avoid repeating the mistakes of the past decade, and enable us to take a more proactive stance toward mitigating potential future vulnerabilities. Of course, we at the Fed are not alone here. Since the recent financial crisis, central banks worldwide have been engaged in a broad rethinking of how to better fulfill their mandates. Let me close with a final thought. The largest problems that countries create for others often emanate from getting policy wrong domestically. Recession or instability at home is often quickly exported abroad. Equally important, growth and stability abroad makes all our jobs at home easier. This illustrates the externalities in the work we all do, with more effective fulfillment of our domestic mandates helping to bring us collectively to a better place. Thank you for your kind attention. BIS central bankers’ speeches  3