Any drug, before it is introduced into the market, has to undergo a quality testing process because a substandard drug, if allowed to be marketed, could hurt people badly. If so, why shouldn’t financial products that could hurt the global system, not be subjected to stringent pre-tests? Accordingly, we need to develop institutions to recognize and approve norms for derivative frameworks and structures. Second, we have to ensure greater transparency in reporting and valuation methods. Notwithstanding the robust application of international accounting standards and other globalized approaches, we still have too many subjective features in our valuation and  2  BIS Review 106/2009  reporting systems, and these need to be addressed. It must also be noted that even after years of debate, many of the advanced financial markets still use their national financial reporting frameworks. Third, we need to develop financial and business professionals who would regard their own reputations and integrity ahead of that of their institutions. In order to ensure that this happens, we may need to put in place, rewards schemes, laws and sanctions that support and encourage such behaviour. Fourth, we have to ensure that individual national regulatory authorities would take a greater interest in safeguarding the quality of the balance sheets of the financial institutions within their purview, without conveniently abdicating that responsibility to a mythical “global” regulator. Fifth, we have to build long-lasting and stable partnerships amongst central banks and regulators.

Second, we could wish for lesser volatility in markets, greater credibility of regulatory and enforcement systems, and more responsible and prudent lending standards. Third, let’s wish for much higher attention being paid by all stakeholders towards risk management, better governance practices and more relevant disclosures; and Fourth, we could wish for top priority being given by regulatory authorities, rating agencies and auditors towards risk and risk mitigation, with tough and decisive action being taken in the event of any unhealthy developments. These, in my view, would be the broad wishes, but each of these “wishes” would probably have a series of sub-wishes to expand the scope of the main wishes, and consequently many more could be added, depending on various national and international imperatives. Mr. Chairman, as with all good wishes, it is easy to wish, but a lot more difficult to make the wishes come true! Unfortunately, even the highly creative financial community will not be able to perfect some “mantras” or conjure up some suitable derivatives to make these wishes come true! Necessarily therefore, a lot of painstaking work will need to be done in order to translate these and other wishes into reality. Let me now dwell briefly on a seven point framework, which in my view, would be useful to ensure stability and integrity of the world’s financial system over the next few years. First, as a global financial community, we should establish pragmatic standards in relation to the creation and sustenance of globalized financial instruments, (particularly complex, structured finance products).