Among the challenges we see today, even at the most sophisticated institutions, are the following: •  bringing more integration to the assessment of market and credit risk and the interactions between them,  •  capturing, measuring and aggregating credit exposures stemming from activities across all of a firm’s business lines,  •  assessing the value of positions in portfolios of more complex and less liquid products,  •  capturing the potential implications on market liquidity and price movements of the unwinding of common positions across market participants, and  2/3  •  assessing the implications of the exit of a major counterparty, particularly in the more concentrated segments of the market, and the limitations imposed by the size of the institution itself in responding to adverse market conditions. Together, the three areas I’ve discussed—challenges in counterparty risk management with respect to hedge funds, developments in the credit derivatives market and infrastructure and ongoing work to improve stress testing and scenario analysis–represent areas where uncertainty is necessarily high. And assessing the probability of various outcomes and the potential losses associated with those outcomes is very complicated and hard to do well. Doing so requires care, judgment and a portfolio of different approaches. This is particularly important to do well in a context when we have had such a sustained period of relatively low credit losses and low volatility.
In such an environment, companies too will have to carefully manage the higher input and other costs and how much of that to pass on to consumers, to preserve your margins without losing either competitiveness or affordability. BIS Review 60/2008  1  Subprime crisis and Asia’s continued push to deepen capital markets The second issue is the turmoil in global financial markets. The transmission of the crisis is a good illustration of how inter-connected financial markets are today. The problem started with US subprime mortgages, in fact a relatively small part of the US mortgage market, but it rapidly escalated into other securitized markets, to more generic debt capital instruments and eventually into the wholesale or LIBOR money markets. From there, as central bank surveys have shown, there is now a general tightening of lending conditions to end-borrowers, which are exerting a drag on the US and Western European economies. Asia has felt some of the tremors of this crisis, but as yet we have been relatively unscathed. In the banking sector, a number of banks in the region wrote off losses on their US sub-prime mortgage related assets. Compared to their peers in the US and Europe, the impact on their balance sheets and profitability has been less severe. This can be attributed to a combination of factors. Following the Asian financial crisis, banks here had taken active steps to improve their credit standing by enhancing their capital base.