As a result, after having reached record highs during the months preceding the summer, the issuance of ABSs declined sharply. Some asset classes in the structured finance markets have been hit more severely than others (Chart 2). This concerns the most complex instruments such as collateralised debt obligations (CDOs) squared, synthetic CDOs and constant proportion debt obligations (CPDOs). Among the more traditional products, commercial mortgage-backed securities (CMBSs) saw a significant decline in issuance activity. Indeed, in the latter part of 2007, due to lowered demand for structured credit products coupled with an uncertain outlook for commercial property markets, issuance of CMBSs came to a halt. Issuance activity in the euro area during the last quarter of 2007 dropped to € billion from € billion one year earlier. Also, European CMBS issuance activity during the first four months of 2008 was approximately 28% of the level corresponding to the same period of the previous year. In comparison, residential mortgage-backed securities (RMBSs) have dropped only by 15% during the same time period between 2008 and 2007 and the issuance level in March-April this year was actually higher compared with the same period last year. The sharp re-pricing of credit and liquidity risk in ABS secondary markets had an impact also on supply and demand conditions in primary markets. Prices, measured as spreads over Euribor rates, started to increase during the summer 2007 and some of the spreads stand now above 200 basis points above the 3-month Euribor rate (see Chart 3).

Let me give you just two examples. First, different liquidity categories were introduced in February 2004 to better mirror the risks associated with different asset classes. More liquid central government debt instruments are in category 1, while less liquid asset-backed securities are in category 4 to reflect the limited secondary market liquidity of those instruments. The second example is the establishment of the previously mentioned specific eligibility criteria regarding asset-backed securities, which were inter alia introduced in 2006 to exclude instruments such as synthetic CDOs and cash CDOs containing other synthetic tranches of ABSs. Due to the opaqueness of the market and the product complexity, those instruments were not deemed suitable as collateral for central bank credit operations. The current developments confirm the appropriateness of the measure. The currently ongoing market turmoil has presented us with a wealth of information both on how our collateral framework interacts with financial markets and financial market participants and on the appropriateness of our risk control framework. We will continue to  6  BIS Review 68/2008  assess carefully the collateral we receive and make sure that the rules outlined in the collateral framework are strictly applied, as well as to study whether there are elements in our collateral framework that may need to be refined to make it even more effective. 6. Going forward: transparency  The recent events have highlighted a number of weaknesses in the financial system, namely in the areas of transparency, valuation, risk management practices, the current prudential framework and market functioning.