As a result, the “originate to distribute” model may potentially diminish the likelihood of the credit busts and banking crises that have historically been a major source of macroeconomic and financial instability in many countries. It should be noted though that, even before the outbreak of financial market turmoil, some commentators have voiced doubts about some of the welfare-enhancing effects of the “originate to distribute” model. For instance it has been argued that, while securitisation certainly spreads existing risks, it may in fact encourage the creation of further risks, particularly by relaxing the incentives for banks to screen and monitor borrowers in order to 6 alleviate the informational asymmetries associated with credit contracts. Incidentally, it should be recalled that, when assets-backed securities were in their infancy, concerns about the risks for investors stemming from the possible relaxation of lending and monitoring standards by banks were among the main reasons for scepticism about the prospects of the market for securitised loans. In addition, it has been questioned whether the securitisation of loans has succeeded in ensuring risk diversification. Indeed, for many banks all over the world, risks do not seem to have travelled farther away than the balance sheets of their own conduits, and have been internalised again once the market turmoil erupted. Besides, some banks turned out to have direct exposures through their own investment activity on structured products and secondary exposures via some of their customers.
These weaknesses as well as related policy recommendations from a wide range of fora and organisations have attracted considerable attention over the past months. In my final remarks today, I would like to focus on an area with major repercussions for the smooth functioning of markets, namely: transparency . There is common agreement on the view that a sound transparency framework based on improved disclosure, high-quality accounting standards and solid valuation practices is pivotal for ensuring market confidence and enhancing market discipline. In this respect, the financial market turmoil brought to the forefront a number of shortcomings: disclosure of information on risk exposures to and valuations of structured products and off-balance sheet vehicles proved to be opaque and very diverse in terms of scope and detail, complicating comparison across financial institutions. Furthermore, at the instrument level, the information provided to the market by institutions involved in the securitisation process has been limited, especially in relation to the quality of underlying asset pools. This lack of transparency both on exposures to instruments and at the level of the instrument itself contributed to the loss of market confidence and, as I mentioned earlier, led to disruption in various segments of the financial markets. The complexity and opacity in instruments supported also to an overreliance on ratings and rating agencies.