BIS central bankers’ speeches  the EDTF recommendations would be a material step in the direction of improving transparency about regulatory capital ratios. What the EDTF recommendations, by themselves, cannot achieve is an assurance of prudence in risk weights. This would require disclosure of alternative capital adequacy benchmarks. For example, last year the Swiss National Bank requested that Swiss banks publish standardised measures of credit risk as a benchmark alongside model-based measures. This would provide information on how prudent different banks were being in their model-based estimates. This, too, might usefully be thought through globally. A more valuable set of disclosures still would come from conducting HPE on a systematic and comprehensive basis internationally - systematic in the coverage of different assets, comprehensive in the coverage of institutions. Making the results of those exercises available to bank supervisors would enable actions to be targeted at banks deviating materially from the pack. Going one step further, making those HPE results available to investors would enable them better to price (im)prudence. Any or all of these disclosure initiatives would help reduce uncertainty. At the same time, disclosure can only ever be a partial solution. For example, by itself it can do nothing to streamline regulatory complexities. In some instances, disclosure could even accelerate the race to the bottom – for example, if naming resulted not in shaming but cloning. (b) Imposing floors A second, more intrusive, regulatory intervention would be to place greater regulatory constraints on banks’ internal models.

It is only when confidence improves, typically following a major policy intervention, that the downturn both in the business and financial cycles begin to stabilize. With reference to the current crisis, there were at least two specific features of the financial structures in the advanced economies that amplified the procyclical tendencies in the three cycles I have just described, thereby making the situations worse than might have been. First, the duration of the upswing in the financial cycle was made longer by changes in the financial structures that resulted from financial innovation, misplaced incentives, and the way businesses had expanded by circumventing financial regulation which allowed risk to be underrecognized for a long period. A case in point is the originate-to-distribute model, the CDO derivatives, and the use of SIVs as a vehicle for taking risk out of banks’ balance sheets. Second, in this crisis the downturn of the cycles were particularly damaging partly because of the interactions or feedbacks within the financial system, as opposed to the interactions between the financial system and the real economy. These within-the-system interactions took the form of positive feedback loops in various market segments that were set in motion in the downturn as market participants responded to the emerging problems and distress. Such feedback loops included the SIV shutdown and its compounding effects on CDO losses, the asset fire sales driven by risk management response by banks, and heightened concern about counterparty risk that precipitated the hoarding of liquidity.