In part this has been spurred by competitive forces. That such forces will diminish as financial restructuring accelerates seems unlikely. Information asymmetries lie at the heart of market failure, and the market's way of resolving them can give rise to unpredictable outcomes. Ensuring that markets have adequate information about national economies, the strength of financial systems, aggregate positions and the financial standing of counterparties is important. Equally important, if not more so, is to ensure that market participants' approach to risk management reflects the full balance of costs and rewards implied in their decisions. Given the costs and the difficulties of managing the successive crises over the past decade, we must continue to devote considerable efforts to avoiding future crises and try hard to understand the kinds of vulnerability that lie behind them. The work now being carried out in various international fora is thorough and can be summarised under three headings: crisis prevention, crisis containment and crisis resolution. Much of this work involves international institutions like, for instance, the International Monetary Fund, the World Bank, the Bank for International Settlements, the Basel Committee on Banking Supervision, and the OECD, as well as the Financial Stability Forum. However, it is with national authorities that the often hard work of implementing policies and codes lies. The measures will contribute to better financial stability only if countries actually adopt and implement them. A crucial ingredient in achieving this is of course to involve countries, formally or informally, in the development of the policies, codes and standards.
The crisis probability equation is estimated directly on a cross-country historical dataset, similar to the one described in appendix 1, giving estimates of ℎ0 = −1.7, ℎ𝐵 = 5.2, ℎ𝑘 = −27.8. The intercept is then adjusted to ℎ0 = −1.7 + 0.11ℎ𝑘 , to incorporate a steady state capital to risk-weighted asset ratio of 11%. The leakage 𝜙𝑀 (1−𝑏)  1  𝜙𝑠 𝑏  3  of credit into the market-based finance sector, given by ( 𝑠 𝐵  ) is equal to − in the red line in Chart 8, to  make it the same size as the leakage to foreign banks in the alternative model discussed below. Therefore 𝑏 = 0.75 implies that 𝜙𝑠𝑀 = 1. Finally, the policymaker’s preference parameter is set to 𝜆 = 0.05, broadly consistent with the literature where loss is derived from the welfare of agents in the economy, 𝛽=0.99 and 𝜁 is varied to derive each curve in Chart 8, where each point represents optimal policy for a different 𝜁. The policymaker’s period 2 loss if there is a crisis, relative to when there is not, is set to just over 4% of GDP lost for 3 years. This is broadly consistent with Chart 6 in Brooke et al (2015), which assumes that the cost of crises will be lower under a credible resolution regime. 3.