Setting the right framework for modern financial markets – Lessons learned from the recent crisis.

Abstract

The current financial crisis is a watershed event that will require comprehensive action by the financial industry to restore confidence in financial institutions in general and the market for structured credit products specifically. The originate-and-distribute model will survive, but will undergo modification and will require banks to upgrade their operations. An improvement in risk management (both in approach and process) is the most important area, with additional focus on liquidity management and derivatives markets infrastructure. Regarding valuation issues, reform efforts must recognise that this is not “just” an accounting issue. Changes must respect the benefits of fair value accounting, but, at the same time, address the issues of illiquid markets, procyclicality and consistency between accounting standards.