By April 2008, the FSF had reached consensus on a set of 67 policy recommendations aimed at addressing the vulnerabilities identified in the global financial system. Some of these recommendations concern structural changes and thus can only be implemented over the medium term. However, a number of priority areas calling for immediate action were identified and the relevant recommendations are already being implemented by the competent authorities and the industry. In this respect, a major priority area involves the disclosure of financial institutions’ structured finance-related exposures and their valuation practices. Many large global banks have already applied the methodology set out in the FSF report to their holdings of complex and illiquid instruments in their mid-year financial reports. By doing so, they have demonstrated the willingness of the private sector to contribute to strengthening market confidence by increasing transparency. I strongly support this development and believe that the example set by these banks should be followed by a wider range of institutions. Furthermore, guidance on transparency has been provided and is being further developed by the Basel Committee on Banking Supervision and public sector initiatives, such as the European and the American Securitisation Fora. In the same vein, the International Accounting Standards Board is intensifying its work to enhance the accounting and disclosure standards for off-balance sheet entities and to develop guidance for valuation in illiquid markets.
Indeed, all financial sectors are impacted by market developments as the boundaries between financial activities are becoming increasingly blurred. More broadly, all competent financial authorities, central banks, supervisors and ministries of finance should strengthen their coordination mechanisms for managing a crisis impacting cross-border financial institutions. In Europe, an important step has been taken in this direction with the Memorandum of Understanding signed by the financial authorities of all EU Member States in June 2008, which established common principles, procedures and terminology to be used by all parties involved in a cross-border crisis. BIS Review 123/2008  5  Conclusion We are experiencing a very challenging and demanding episode of the market correction which started more than a year ago and was due to a significant underassessment and underpricing of risks in global finance. This fostered extremely high risk–taking behaviour, excessive leverage and a widespread use of toxic, obscure and abnormally sophisticated financial instruments. In this regard, global finance was potentially unstable before the start of the turbulence and this was mentioned publicly, particularly in 2006 and the first part of 2007, by a number of speakers, including myself. The sub-prime mortgage crisis has therefore played the role of a trigger but there was a good deal of explosive around. My experience of previous crises is that it is extremely important to analyse situations very carefully and lucidly and never to underestimate its gravity.