Even if not directly, risks could come indirectly via the exposure of their clients, especially in the case of interlinked market and credit risks. The present environment also raises concerns of the close link between financial and reputation risks. Banks or their affiliates, be they fund management or insurance arms, may have sold inappropriate products to clients without doing proper due customer diligence or education. As a result, clients’ losses could lead to either bad assets and credit risk, counterparty risk, or reputation risk for banks if dissatisfied customers generate queue and protest in front of the banks, or even legal risk. In this environment of tight liquidity, and depositors have bargaining power, reputation risk and customer queue and loss of confidence could translate into liquidity risk. This brings me to the third risk implication from this global crisis, which is the liquidity risk. Indeed, tightened global liquidity will be more pronounced for economies that rely on external short-term debt. For other economies, the shift of external funding toward domestic sources and the effect on trading partners’ economies could cause a widespread contraction in credit supply. Furthermore, re-pricing of risks by investors and deleveraging has increased the risks and volatilities in global financial markets, which could in turn lead to greater risk-aversion in emerging markets. As a consequence, there could potentially be more reversals of capital flows from emerging markets, including Asia, thereby denting growth in countries heavily dependent on capital inflows.
The world’s current financial system with all its imperfections, can still deliver enormous value. Already, the bold and far reaching steps introduced by many governments and regulatory authorities as well as by the “victims” of destability, have shown us that the “baby” could recover and grow. In fact, many economies are showing signs of recovery and are seeing light at the end of their respective tunnels. In the light of these developments, we must maintain our energy levels and optimism. Even in  BIS Review 106/2009  3  the midst of the crisis, we have observed many systems that are solid, and frameworks and institutions that are strong, reliable and credible. These institutions must be recognized and encouraged to provide the leadership and direction to bring stability and credibility back, quickly. It is also time for the productive sectors of economies to re-invigorate themselves and deliver higher outputs, so as to support a faster turn-around. Mr. Chairman, it is also now abundantly clear that the world must collectively approach the present unprecedented threat. Already, the integrated actions of several governments and central banks, by virtue of the successes achieved so far, have proved this point. But there is a lot more to be done. In that endeavour, the consolidation of the thoughts and ideas of academics, activists, practitioners, regulators, and policy makers at fora such as the one you have so efficiently organized, would undoubtedly enrich this process and policy debate. These in turn, will surely accelerate the global recovery.