Indeed, the crisis unraveled significant gaps in the extent and manner of public disclosures that were made by financial institutions regarding their on- and off-balance sheet risk exposures. Investors on the other hand, were over-reliant on credit ratings which were based on methodologies which were not sufficiently robust, or lacked transparency about the rating parameters. As a result, the effects of market discipline did not occur as expected, while regulators which relied on market discipline to take effect, did not act pre-emptively to add discipline where it was needed. BIS Review 71/2008  3  Thirdly, developments in the regulatory, accounting and macro-surveillance frameworks had not anticipated, nor provided for, the complex inter-linkages of the modern financial system. The most significant evidence of this was when large scale downward valuations of assets due to accounting rules heightened risk aversion, which in turn further constricted market liquidity, thereby perpetuating a vicious cycle. Globally, episodes of financial crisis have again demonstrated that market, credit and operational risks are closely inter-linked. These experiences have underscored the critical importance of good governance, sound risk management, rigorous supervision and a strengthened crisis management framework which is sufficiently robust to withstand extreme market conditions. The Malaysian banking sector on the whole is sound. Domestic banking institutions, in particular, have benefited from the broad-based reforms and capacity building measures that had been undertaken following the Asian financial crisis.

Nonetheless, higher prices are temporarily weighing on household purchasing power and we must remain vigilant. Sud Ouest: Might the speculative attacks on the some countries’ sovereign debt and concerns over the euro’s future dampen consumption and investment? Christian Noyer: No, there are no grounds for concern. Europe has shown over the past few months that it is capable of rallying together and providing effective and innovative solutions for countries that fall prey to speculative forces. Sud Ouest: But it is evident that this is not enough to deter investors from attacking the sovereign debts of some countries… Christian Noyer: At present, these attacks are centred on the countries of Southern Europe. Markets tend to tar with the same brush all the countries perceived as the most fragile in the euro area, whereas their situations differ considerably. The sovereign debt dynamics of some non-European G7 countries are more worrying that those of many euro area countries. Sud Ouest: Aren’t speculators betting on a break-up of the euro area? Christian Noyer: By definition, this scenario is totally ruled out: no country is willing to consider this option since it would have an astronomic cost for all euro area countries, the strong and the weak alike. Sud Ouest: Won’t the fiscal austerity measures imposed on euro area countries that have benefited from EU-IMF loans have exorbitant social costs? Christian Noyer: They may be hard to bear. But it would be unrealistic to think that growth and purchasing power can be lastingly sustained if public deficits continue to rise.