How can we expect emerging economies to participate fully in an open global system without the confidence that they won’t again be side-swiped by the failure of a large foreign bank? That confidence is growing as we make the system safer. Consistent, full and timely implementation of global standards is necessary to continue to build the cross-border trust on which an integrated system can be founded. Once the safety of the system is secured, the costs of openness will be contained. The road will be clear to secure the substantial benefits of openness in supporting trade and investment. Conclusion The Brisbane Summit marked the point at which the post-crisis system of prudential regulation was settled. That system, built on safer, simpler and fairer foundations than the one that led to disaster is able to serve households and businesses right across the globe. That we have reached this point is a triumph of the optimists over the world-weary arguments of the pessimists. The mutual trust and co-operation that has allowed authorities to get to this point is a vivid reminder of what can be achieved when countries work together. But as I said at the outset, just avoiding a repeat of past failures can’t be the height of our ambitions. Having built that level of co-operation it would be a travesty to stop at the foundations.
The first wave of losses led banks to tighten margin requirements, effectively reducing financing available to the non-bank financial system, causing those institutions to deleverage through asset sales, driving a death spiral of falling asset prices and rising margin requirements. Such dynamics have now been mitigated through agreed minimum haircuts for securities financing transactions and the net stable funding ratio for banks. A simpler financial system As the crisis highlighted, opacity hides frailty. Why was subprime not contained? How did $ in credit losses ultimately cause well over $ in market losses? Because complexity obscured the link between ultimate creditor and debtor, it allowed false assumptions to develop that, when disabused, prompted panic. The mortgage originated by a bank was repackaged by a SIV, that financed it through ABCP, that was bought by a MMF, into which a retail investor placed their savings. It occurred to no one in the chain that the absence of a monitor would influence credit performance. The whole model was based on continual rollover. When subprime losses exposed the misalignment of incentives between loan originators and investors in asset-based securities, the whole system collapsed, imploding core funding markets for banks. Risks that had ostensibly been moved outside the banking system or diversified away were in fact just hiding and, when crisis struck, they came crashing back onto the balance sheets at the core of the system. This complexity is being addressed.