Different working groups underway are addressing a multiplicity of weaknesses and loopholes in the conventional paradigm, and fleshing out proposals that will likely be introduced in the near term.<sup>4</sup> Amid this effort, the Basel Committee on Banking Supervision (BCBS) has developed an array of reforms – some minor, others more radical – that will completely overhaul banking sector regulation and supervision. Some of these include: introducing a global liquidity standard; imposing larger capital requirements on systemically important banks; shifting to forward looking provisioning practices; introducing a countercyclical capital framework (i.e. a conservation buffer and a countercyclical buffer), and complementing the regulatory minimum capital requirements with a leverage ratio that curtails banks’ risk appetite during expansions. These amendments, which build on the Revised International Capital Framework (Basel II), are being referred to as Basel III.

Necessary as these revisions are, this crisis is rooted in the fact that the basic principles of credit risk management were compromised on various levels. As a result of accelerated financial innovation, the banks offered new, but opaque, vehicles for investment. This made it difficult to assess risk levels and the true extent of credit leverage. Thus, as financial institutions began to develop and issue more convoluted instruments, credit risk management became more imprecise and at times erroneous. Without proper regulatory oversight and amid highly liquid credit markets (particularly, facing an infinitely elastic demand of asset backed securities - ABSs - and collateralized debt obligations - CDOs - of ABSs), it further enabled banks to loosen their lending policies and thus continue taking riskier positions. This set the stage for a preeminent collapse as lenient, and at times deceptive, lending practices were combined with extreme household exposure (especially to an upside in interest rates). And to make matters even worse, bank supervisors and regulators often times lacked the appropriate information to readily monitor the developments unfolding in the market place.

Credit reporting systems (CRSs) are important institutions in credit markets in that they provide a complete picture of an individual or firm’s creditworthiness. Besides being important for credit risk management, the availability of high quality and timely information on borrowers’ behavior is important for other reasons as well, such as developing a “credit culture.” A credit culture facilitates access to credit as it addresses the fundamental problem of credit markets: asymmetric information between borrowers and lenders, which leads to adverse selection and moral hazard. This problem is reduced as credit reporting systems capture current and historical lending and payment information. The more accurate, complete and timely information that is available in the credit system, the better the lenders are able to use credit data to grant credits and monitor their portfolios. One of the most important institutional elements supporting a well-functioning credit market is credit reporting firms. They are able to provide rapid access to accurate, reliable, and standardized information on potential borrowers and are of critical importance in determining risk exposure.<sup>5</sup>

> 4 The guidelines that sound financial regulation should observe have been assembled in Brunnermeier _et al_ (2009).

> 5 The benefits of the sharing of positive and negative information and thus of complete credit reporting systems are supported by profuse empirical evidence: see Jappelli and Pagano (1999), Barron and Staten (2003) and Majnoni _et al_ (2004). For theoretical developments see Pagano and Padilla (1993) and Brown and Zehnder (2005).

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