Countries implementing a fixed exchange rate regime have been hit more severely by the crisis compared to those implementing a floating exchange rate regime. In countries with free capital flows, a floating exchange rate regime, – by enabling monetary authorities to adopt a flexible approach in the face of a liquidity crunch in markets – acts as a safety valve preventing over-contraction of the economy, under rapidly deteriorating international liquidity conditions. As a matter of fact, in countries implementing a floating exchange rate regime, economic activity exhibited smaller fluctuations before and during the crisis. Moreover,  BIS Review 79/2010  1  countries under a floating exchange rate regime experience a stronger economic recovery compared to those under a fixed exchange rate regime. The second structural factor that determines the resilience of countries against the crisis is the structure of the banking system. In this period, factors such as asset quality of the banking system, keeping leverage ratios at manageable levels, and proper implementation of regulatory and supervisory activities played an important role in containing the damage and credit crunch in financial markets. The last two factors that determine the level of impact of the crisis on countries are monetary and fiscal policy practices that are considered as cyclical movements in the economy. In those countries, which observed fiscal discipline, implemented countercyclical monetary policies, prevented excessive increases in private sector’s indebtedness ratios in the precrisis period, central banks and governments had the room for maneuver to implement monetary and fiscal policies that could recoup demand shocks.

To the extent these advantages can be realized, a centralized utility can reduce the risk of damaging contagion from a failure of a financial institution affecting overall market liquidity. By making some types of losses more predictable, they can reduce the incentive for firms to withdraw liquidity from and reduce exposure to other counterparties that they believe might have credit exposures to the failed institution. Global integration of payments systems The increase in cross-border financial activity, the global reach of the largest financial institutions, and as a consequence the greater transnational scope of many payments systems have provided a compelling rationale for cooperation to set a higher level of international standards for payments and settlement systems. These same dynamics may lead eventually to a more uniform international platform for payments and settlement concentrated on a much smaller number of systems. But we are not there yet. The myriad of different systems that make up the global network means that payments now cross a complicated mix of legal, technological, and supervisory borders. And this means banks are exposed to settlement risk in a remarkably large number of different value transfer systems. One large U.S. internationally active financial institution now operates in 400 separate payments systems around the world. Differences in legal regimes mean different netting arrangements, collateral requirements, close-out procedures, and bankruptcy implications. Differences in operating platforms and communications standards can increase operational risks.