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The working paper provides a preliminary assessment of the events and to draw some lessons for policies designed to strengthen the financial system on a long-term basis. The paper highlights possible mutually reinforcing steps in three areas, namely accounting, disclosure and risk management; the architecture of prudential regulation; and monetary policy.
The unfolding financial turmoil in mature economies has prompted the official and private sectors to reconsider policies, business models and risk management practices. Regardless of its future evolution, it already threatens to become one of the defining economic moments of the 21st century.
It represents the archetypal example of financial instability with potentially serious macroeconomic consequences that follows the build-up of financial imbalances in good times. The significant idiosyncratic elements, including the threat of an unprecedented involuntary "reintermediation" wave for banks and the dislocations associated with new credit risk transfer instruments, are arguably symptoms of more fundamental common causes.
The policy response should be firmly anchored to the more enduring factors that drive financial instability. This