From the perspective of the public authorities, concerns have been expressed in particular about the lack of transparency on the identity of the ultimate risk holders and about adequate risk management by the institutions dealing with these instruments. In particular, financial innovations may be subject to problems when their behaviour has not yet been tested in difficult market conditions. As for any new instruments, probability analysis on the basis of historical data cannot be used for the credit risk transfer instruments that have been around for a few years only, and, thus, an accurate pricing of risk is not always possible. Inadequate data was already a problem in the use of Value-at-Risk models for risk management purposes by hedge funds prior to the Russian and LTCM crises. This kind of experience could reflect a lack of full understanding by market participants of the nature of the risks they face. Turning back to the credit risk transfer instruments, these instruments allow banks to sell their credit risks, and in so doing the risk profiles of other financial institutions, particularly insurance companies, are also transformed. Hence, a major outcome of the financial innovation process is the transformation of the traditional risks faced by financial institutions. These developments also affect the effective supervision of financial institutions, as it is increasingly more difficult to obtain adequate information to monitor the complex and possibly fast-changing risk positions. The financial innovation process has, indeed, necessitated the revision of the traditional supervisory approach concerning banks and other financial institutions.

I would like to end my comments on the work of the Basel Committee by touching briefly on another regulatory matter currently under review, the treatment of large exposures. This falls within the field of prudential measures additional to the solvency ratio, which aim to ensure the survival of banks in extreme situations. The review focuses on the treatment of exposures to third parties, since that of intra-group exposures has been postponed for the time being. The general principle is that exposures to all counterparties should be subject to limits based on the capital of the bank. That limit has been set generally at 25% of tier 1 capital, although for certain exposures, such as those between systemic banks, it is stricter. Notably, provision is made for the possibility, after an observation period, of limiting exposures to central counterparties (CCPs), although this matter is open and first requires an assessment of the effects of other rules governing relationships between banks and CCPs. Let me now say a few words on some of the main regulatory projects on which the Financial Stability Board (FSB) is currently working, particularly that to promote a new regulatory framework for the treatment of systemically important institutions, i.e. those whose complexity, size and interconnectedness are such that their failure could cause serious problems to the global financial system. This new framework rests on four pillars: additional loss absorbency, effective resolution mechanisms, increased supervisory intensity and more resilient financial market infrastructure. Unquestionable progress has been made in implementing this framework.