the balance sheet and income statements of numerous financial institutions at international level. this turmoil originated in the subprime mortgage segment, although it progressively spread to lower - risk financial statements. one of the business segments which had grown up in the us mortgage market was characterised by the extension of mortgages to individuals or households with scant ability to meet their payment commitments. these are known as subprime or high - risk mortgages. also, the process of transformation and securitisation of subprime loans consisted not only of packaging them and transforming them into bonds ; in addition, the asset - backed securities issued were sliced into smaller portions and re - packaged, so the instruments purchased by investors were increasingly complex and opaque and it was very difficult to ascertain their true level of risk despite the excellent credit ratings generally awarded to them by rating agencies. numerous us and european banks were among those investors. moreover, they invested in the securities via transactions recorded off their balance sheets through investment vehicles ( conduits and sivs ) which enjoyed a regulatory treatment in terms of capital requirements that was much laxer than if they had been consolidated on bank balance sheets. these longterm investments were financed at very short - term through the issuance of securities targeted at money market investment funds or large non - financial corporations, which used them to put their temporary cash surpluses to work. the house price slump in the united states and the marked worsening of defaults on subprime lending, particularly on the loans extended in 2005 and 2006, sowed doubts among investors, which began to ask about the level of risk of the aaa - rated bonds they had bought and which offered higher returns than those on government debt. the complexity of the products made it difficult to determine their actual ultimate exposure to the us subprime segment. in these circumstances, both money market investment funds and non - financial corporations withdrew from the market. the investment vehicles created to transfer the risk and keep it off bank balance sheets then saw their liquidity dry up and had to turn to the lines of credit committed by their sponsoring banks. this increased the amounts which banks had to borrow and forced them to turn to the central banks for financing from 9 august 2007. the tensions which characterised thereafter the functioning of the interbank and credit markets, despite attempts by the monetary authorities to restore normality, were symptomatic of a growing lack of confidence about the situation of financial institutions in the main developed economies. these misgivings were

the central bank for crisis management. going forward, it would be important to clearly define principles for access to emergency liquidity assistance from the central bank. the principles will need to balance the imperatives of ensuing capacity to provide adequate liquidity support during the crisis while ensuring that perverse incentives for lax liquidity management are not built up in the banking system. the principles may also need to address issues relating to collateral standards, given the experiences of recent crises. the spectre of “ too big to fail ” institutions raised its ugly head during the 2007 global financial crisis focusing attention on the lack of the necessary arrangements for orderly resolution of such institutions. a crisis management framework will need to be alive and open to the possibility of failure, if only to prevent the associated moral hazard problems. for the “ nofailure ” perception to be altered, robust arrangements, which allow orderly resolution and mitigate systemic consequences of such failures will need to be put in place, especially for the resolution of cross border financial firms. the financial stability board has recently released the “ key attributes of effective resolution regimes ” that would lay down the essential features and tools that national resolution regimes for financial institutions, including non - bank financial institutions, should have. for the large and complex financial institutions, ex ante resolution plans, or “ living wills ” are one solution being contemplated internationally in this regard. recent initiatives towards introducing contingent capital instruments may also potentially play an important role in banks ’ recovery and resolution plans, going forward. crisis prevention while the subject of this seminar is crisis management, let me emphasize that the most preferable approach to fostering financial stability is crisis prevention. a series of reforms to the regulatory architecture and plethora of reforms are underway globally which seek to reduce the probability of a crisis occurring. the basel iii reforms aim at increasing the resilience of banks through prescription of a higher quality, quantity and consistency and better risk coverage of capital. the set of reforms for systemically important financial institutions are aimed at reducing the probability of failure of these large and complex financial institutions and at putting in place a robust resolution framework so that the institutions can be winded down in an orderly manner, should they fail. regulatory perimeter issues are being addressed by putting in place a regulatory framework for the shadow banking system. another set of reforms are aimed at addressing issues in the otc derivatives markets by ensuring that the transactions in these markets are reported, centrally cleared and, where possible, settled through a central counterparty. compensation structures are