Products are likely to come with a broader range of standard expected performance statistics. BIS Review 93/2008  11  •  Third, as already recommended by the Financial Stability Forum and the CGFS 8 , rating agencies will supply additional information on the risk characteristics of rated securities and the sensitivity and uncertainty attached to their ratings. But there will also be increased recognition of the limitations and costs of any monitoring function for highly complex products. That, too, will support greater standardisation and transparency. •  Fourth, and relatedly, end-investors will demand more explicit rules governing acceptable collateral for securitisation and greater due diligence and risk sharing by originators and issuers. For example, strict definitions of prime/Alt-A/sub-prime mortgages will be required based on FICO scores, loan-to-value ratios and other characteristics. And originators will be required to report their exposure to the securities they issue. Contracts, for example, may require issuers to declare and maintain a significant stake in securitisations to align their incentives to screen and monitor loans. •  Fifth, investment banks will continue to offer tailored products to match specific risks. But there will be much greater recognition of the illiquidity and hence cost of the bespoke component. Equilibrium liquidity premia will be higher. That is likely to lower demand for such products, perhaps substantially. •  Sixth, banks and other financial institutions will provide more information on exposures as pressures to improve market disclosure and transparency continue. And already regulators are assembling best practice accounting disclosures which should become standard reporting.

One year on from the onset of the current credit crisis, what have we learned about the performance of the financial system and such market imperfections? 17 Looking broadly, an important lesson from the past year, is that these frictions appear more powerful than market participants and financial authorities previously judged. They pose substantial barriers and practical limitations to the achievement of a stylised vision of full, complete, and efficient markets in fundamental components of risk. Five areas of potential weakness are highlighted in turn: incomplete information; alignment of incentives; liquidity in financial markets; robustness of market infrastructure; and system dynamics. Incomplete information 18 The vision of a world of complete and efficient markets for risk depends on full information. This full information requirement sounds deceptively simple but is actually extremely onerous. An investor needs to know the mapping between states of the world and the pay-offs they would receive in each state as well as the likelihood of these states of the world materialising. This means not only understanding the details of highly complex contracts but also the effects of the interplay between exposures and contracts of all the other agents in the economy. So not surprisingly, many of the problems that have occurred over the past 10 months have arisen out of incomplete and asymmetric information. There are a number of dimensions. 19 First, it is very difficult to ascertain the pay-off distribution for many instruments.