investing in products whose risks have not been fully understood. The third ingredient the turbulence has revealed in relation to this type of product has been the lack of transparency, both regarding the valuation models used and the degree of exposure assumed. The lack of confidence in the financial markets is largely related to a lack of information, to such an extent that financial institutions themselves have not trusted one another, prompting serious problems in interbank markets. Yet not all products related to securitisations are so complex or pose such valuation problems as those I have mentioned. The most straightforward securitisations, such as those used by Spanish financial institutions, are characterised by their use of well-diversified, granular portfolios made up of homogenous assets. In these conditions, the models available do not have product-valuation problems, and it is straightforward to calculate the expected losses associated with the bonds classified in the different tranches of the securitisation. What is more, in Spain's case, where no market segment comparable with the US subprime one has been developed, the quality of the securitised assets is very high. Not only have Spanish credit institutions not designed complex structured products, they have not invested in them either. In this respect, risk management has functioned correctly, since excessively risky products of which full understanding was lacking have been avoided:  BIS Review 62/2008  3  the absolute absence of direct and indirect exposures to US subprime mortgage loans is a clear example of this.

And second, because prudential supervision was not sufficiently active in detecting and preventing this type of instrument. None of these elements has been present in the Spanish banking system, which explains why Spanish banks have no exposure to these vehicles. Spanish banks have obtained sufficient profits pursuing their traditional and typically retail activity, meaning they have had no great interest in developing either the structures or products that are at the root of the current problems. The Banco de España has been categorical regarding its requirement that these vehicles be consolidated for accounting and capital purposes. Today, following the application of International Financial Reporting Standards in 2005, this requirement to consolidate conduits and SIVs is now very clear. But even before the IFRSs came into force, Spanish banks had no incentive to develop these off-balance sheet vehicles, because the Banco de España always analysed the risks assumed by banks from a consolidated perspective. Fourth lesson: on the procyclicality of banking regulation The fourth lesson to be drawn from the turbulence is related to the debate that has reopened on international markets about the way in which financial regulation should address so-called procyclicality. In particular, concern has been raised about Basel II and international accounting standards. We should perhaps begin by acknowledging that financial market participants themselves behave in a procyclical way, as they tend at favourable times in the cycle to forget about the consequences of an excessive build-up in risks.