For example, the gross market value of the OTC derivative markets increased from USD 2 trillion in 1998 to USD 35 trillion at the end of 2008. The intensive use of complex and off-balance sheet products distanced the final borrower from the final investor. As underlined by a recent IMF study, 1/3  BIS central bankers' speeches  most of the pre-crisis financial globalisation had taken place through cross-border activities with little involvement from global banks in local retail activity. It ultimately led to a reduction in efforts from banks to monitor the creditworthiness of their borrowers and mitigate the associated default risks. These two levels of complexities were exacerbated during the European sovereign debt crisis as European banks were put under funding pressures by market participants concerned by the opaqueness of their portfolio composition and the lack of credibility of the previous resolution mechanism. B – A comprehensive and strong policy response: both on the regulatory and the supervisory sides However, I just want to convince you of how strong the regulatory and supervisory responses have been since then, in curbing the detrimental impacts that overly complex organisations or overly complex activities might produce. First, the new regulatory framework treats global and complex banks differently. Global Systemically Important Banks (aka GSIBs) are subject to higher capital requirements explicitly determined by the importance of their cross-jurisdictional claims and liabilities, their OTC derivatives, and their Level 3 assets exposure.

That said, I also believe that more work remains to be done to broaden the definition of LIBOR so that it represents the reality of new funding patterns for banks, and to also tie submissions more closely and systematically to observable transactions. A second notable development was the publication of an international set of principles for financial benchmarks developed by the International Organization of Securities Commissions9 (IOSCO) in 2013. These principles include a set of 19 specific standards across governance, benchmark quality, methodology and accountability that have emerged as the international standard. IOSCO has rightly focused on tying benchmarks more closely  8  The Wheatley Review of LIBOR: Final Report. 9  Principles for Financial Benchmarks: Consultation Report, International Organization of Securities Commissions. BIS central bankers’ speeches  5  to observable, arms-length transactions. While a pure transactions-based rate will not solve all problems for all benchmarks, this is an important step toward eliminating excessive reliance on expert judgment. As part of the international reform efforts, the Federal Reserve played a lead role in a set of recommendations for the reform of reference interest rates produced by the Financial Stability Board (FSB). Former Governor Jeremy Stein, followed by Governor Jay Powell, co-chaired a working group with Martin Wheatley of the U.K. Financial Conduct Authority (FCA). This working group was charged with reviewing existing interest rate benchmarks, and for establishing and guiding a group of market participants to identify the feasibility and viability of adopting alternative reference rates.