##italization. as we are all aware, the financial crisis had an adverse effect on both the oil and gas sector and the capital market where the nigerian banks were exposed to the tune of n1. 6 trillion as at december 2008. the result was a sharp deterioration in the quality of banks ’ assets which immediately led to concerns over banks ’ liquidity. in deed, the nigerian banking sector was thrown into severe crisis as many of the banks became distressed. bis central bankers ’ speeches 3. 3 remedial measures to mitigate the impact on the banking sector the initial diagnosis of the distress in the banking system amplified by the global financial crisis as a liquidity problem led to the introduction of several measures by the cbn between 2008 and 2009. these measures included, among others, the reduction in the monetary policy rate ( mpr ), cash reserve ratio ( crr ) and liquidity ratio ( lr ). the mpr was gradually reduced from 10. 25 per cent to 6 per cent to its present level between september 18, 2008 and july 7, 2009 and subsequently raised to 6. 25 per cent on september 21, 2010. similarly, the cash reserve ratio was reduced from 4. 0 per cent to 2. 0 per cent and further to 1. 0 per cent while the liquidity ratio was progressively reduced from 40 per cent to 25 per cent. the cbn also issued directive to banks to restructure their margin loans up to 2009, and expanded its discount window to allow additional instruments as well as allow banks to borrow up to 360 days ( currently suspended ) in addition to stoppage of liquidity mopping - up. greater emphasis was placed on enforcement of the cbn code of corporate governance to promote transparency and accountability in banks as well as the review of contingency plan for systemic distress in banks. these measures did not fully resolve the problems as the system remained fragile. it was discovered that nine banks were the main users of the expanded discount window ( edw ) over a nine - month period ending june 2009. accordingly, when the cbn eventually closed the edw in july 2009, and in its place, guaranteed interbank placements, it was observed that these nine banks were the main net - takers under the guarantee arrangement. at this point it was clear that the issue was far beyond the liquidity problem and if drastic actions were not taken, the financial system could collapse. 4. current banking sector reforms 4. 1 diagnosis and initial stabilization steps given the precarious

subprime mortgage - backed securities and related credit derivatives rampant in the market at that time were assigned the highest aaa rating by the major cras. and, according to the general estimates of these agencies, the probability of default within a year for debt instruments with such a rating was near zero ( 0. 000 % ) ; while the probability of default within five years was a mere 0. 09 %. now, we all know that these cras were dead wrong. many people, including professional and institutional investors, had a misplaced trust in these agencies and underestimated the risks involved. they learnt a painful lesson in 2008 / 09. 3. of course, cras cannot be blamed for every market failure. let ’ s turn to the european sovereign debt crisis, the epicenter of which has been greece. when greece joined the eurozone in 2001, its sovereign debt rating was a mere a -. the market yield of its sovereign debts denominated in the greek drachma in 1995 was about 17 %. in 2003 after its accession to the eurozone, greece had its credit rating upgraded slightly to a +, still not a very high rating. yet, in the ensuing nine years or so, market players were particularly exuberant on the country ’ s prospect and piled into greek sovereign bonds without really taking into account its economic fundamentals, fiscal positions and sovereign rating. at one stage in 2005, the greek sovereign bonds were traded at a spread of as low as eight basis points above the triple - a rated german bunds. looking back, this was essentially blind chasing of high risk investments by tens of thousands of market players and investors impervious to objective economic analysis and credit ratings. in the end, they suffered great losses. furthermore, the capital market failed to price in a reasonable risk premium for the greek sovereign debts, suppressing greece ’ s borrowing costs for a prolonged period of time. bis central bankers ’ speeches this effectively encouraged a borrowing binge by greece that ended up in the plight today. if the market had asked for a higher risk premium, the increase in borrowing costs might have sent a sobering message to the greek government and its people to avoid overstretching themselves and therefore might have avoided a near breakdown of their economic and financial systems. 4. hong kong also experienced market failure in 1998, a year after the asian financial crisis had severely hit a number of regional economies. although hong kong managed to stand on its feet after the crisis, market