Regulation and markets need to work hand in hand. Take the example of securitisation, which has been much maligned since the crisis. Let’s look at the good, the bad, and the ugly of securitisation. The good is that securitisation is a useful means of mitigating and diversifying credit risk through capital market intermediation. The bad is that securitised products became so complex that the inherent risks were obscured when bad loans were passed on to unknowing investors. And it became ugly when these “toxic assets” blew up in the balance sheets of financial institutions across the spectrum, triggering a crisis of systemic proportions. 13. The solution is not to restrict securitisation. Rather, regulation must seek to help correct the imperfections in the securitisation market. International securities regulators have therefore recommended improvements in disclosure standards to allow investors to understand the risks of these products better. To enhance market discipline, it has also been proposed that originators retain a portion of each issue to keep some “skin in the game”, to align their incentives with those of investors. Finally, additional capital may be needed to cover residual risks. 14. The stability of the financial system is not the responsibility of regulators alone. Regulators can provide the traffic lights and signposts on the road to reform, but road safety ultimately depends on the drivers on the road, the industry players. The management of risk must not take a back seat to the drive for increased profits. Realigning macroeconomic stability and prudential supervision 15.

Regulators used to worry about institutions that were “too big to fail”; now, they worry about institutions that are “too connected to fail”. Size matters ; but connectivity matters more. 21. This high degree of interdependence means that governments in major economies can no longer act in isolation. Regulatory policies must be globally consistent to minimise the risk of arbitrage. Supervisory actions must be internationally coordinated to maximise their effectiveness. 22. Yet, regulation and supervision is essentially a national prerogative, that must cater to the domestic context and circumstances to be effective. Recognising this tension, international policymakers have focused on reaching consensus on international standards that serve as a minimum benchmark, while allowing countries the freedom to choose appropriate regulatory tools to fit individual circumstances. A uniform, one-size-fits-all international regulatory regime will not work. 23. The most striking application of this principle is in the approach being taken for the regulation of global systemically important financial institutions, or G-SIFIs. These institutions, because of their size, complexity, cross-border nature, and interconnectedness, would cause significant disruption to the global financial system and economic activity, if they failed in a disorderly manner. There is thus a need for global supervisory cooperation, in order to identify the key points of failure within such institutions. The Financial Stability Board, together with other international standard setting bodies, is rethinking its approach towards the monitoring, sharing, and mitigation of systemic risks posed by G-SIFIs. BIS central bankers’ speeches  3  24.