Would it have been fully aware of conduits and special investment vehicles (SIVs)? Against this background, the financial crisis has triggered a number of initiatives to improve the monitoring of the shadow banking system. These include calls for mandatory reporting by financial institutions (e.g. hedge funds with significant volumes of assets under management) as well as the reporting of amendments to the accounting treatment of conduits and SIVs to ensure greater transparency with respect to links to sponsors, for example. These initiatives are expected to contribute to a better coverage of the non-regulated financial sector, coupled with a greater awareness of the business models and topics that were overlooked in the past. This information would not have been available to a pre-crisis ESRB. The crisis has also stressed the importance of developing ways to measure systemic risk, as it clearly showed that – both for market participants and regulators – without proper measurement there can be no proper management. A comprehensive strand of work relating to complementary measures of risk, capturing elements of leverage, liquidity, correlation of positions, concentration of exposures, has been initiated both by the private and public sectors. Prior to the summer of 2007, there was less emphasis on the need for targeted and adequate measurement of variables, including a critical stance on systemic risk, for supervisory and financial stability purposes.

The experiences with the crisis and the decision to establish a macro-prudential stability function in Europe suggest that, even when building on existing structures, significant efforts are called for in order to extend and further improve models and tools. While it would be desirable for the risk assessment exercise to be increasingly quantitative, it should never become mechanistic or fully model-based. Expert judgement and qualitative assessments will always be crucial to understand the messages coming from various analytical tools, also taking into account overall intelligence efforts. Comprehensive information base Irrespective of their level of sophistication, models need to be fed with the appropriate data in order to produce results that, in addition to their analytical interest, can support policy messages. A comprehensive information base is also key in the risk surveillance phase that precedes the actual risk assessment. This is because the establishment of a wide radar screen supporting rigorous monitoring is only possible if the critical information is available. The current crisis has convincingly shown that a significant part of credit intermediation was channelled outside the banking sector and the regulated financial sector. The non-regulated or “shadow” banking system was almost totally off any surveillance radar screen. Not enough was known about special investment vehicles, conduits, securitisation markets and instruments, or about all the financial intermediation that takes place outside the traditional banking system. Moreover, little was known about the direct and indirect exposures between this shadow banking system and the regulated one, which turned out to be substantial.