. 2. 1 how it all began to some extent, the financial crisis had the same origins as many earlier crises : high credit growth, fuelled by an environment of low interest rates. there was, however, a specific element to this crisis : financial innovation. in the 1990s, new types of securitisation were added to the toolbox of financial engineers. these made it possible to bundle together a large portfolio of loans and to sell small slices, or tranches, of this portfolio. in essence, securitisation is nothing but an instrument to enable the efficient allocation of risks. bis central bankers ’ speeches however, there were two problems that turned this otherwise beneficial instrument into one of warren buffet ’ s “ financial weapons of mass destruction ” : distorted incentives and a lack of transparency. during the 2000s, many financial firms granted large amounts of loans, especially in the subprime segment of the mortgage market. however, they did not intend to hold these loans on their own books for long – they were only “ warehoused ” as it was called. instead the banks securitised the loans and eventually sold them on to other investors. this originate - to - distribute business model destroyed incentives for prudent behaviour. the originators of the loan knew they would swiftly shift the risk further down the line ; so why should they bother to take particular care in evaluating the creditworthiness of the borrower? furthermore, more often than not, the securitised loans were rated by the very same agencies that helped to structure the loan portfolios. not surprisingly, they granted these structured portfolios rather favourable ratings. based on these ratings, many banks invested in securitised mortgage loans, thereby exposing themselves to the us housing market. this process was encouraged by another layer of distorted incentives. volume - linked revenue structures within the banks created incentives to pursue growth rather than to evaluate and monitor risks. all these distortions induced lending standards to fall : they led to a flood of cheap mortgage loans to subprime borrowers and they promoted the distribution of the associated risks throughout the whole financial system. and due to a lack of transparency along the securitisation chain, no one really knew on whose balance sheets the risks eventually ended up. then, in 2007, housing prices in the us started to falter and us subprime borrowers started to default on their loans. 2. 2 banks get into trouble once that happened, a crucial asset in financial markets just

as you know, the delta project, considered one of the seven wonders of the modern world, comprises different types of constructions, such as dams and dikes, that together protect the nation from the risk of flooding. similarly, the set of regulatory measures being developed by the basel committee will act together as a series of defences against risks to financial stability. we also need to agree on the height of the defences we are putting in place as this is linked to the overall level of protection we are aiming at. this will determine the appropriate level of capital. the official goal of the delta project is to reduce the risk of flooding. let this be an inspiration for us in our efforts to safeguard the stability of the financial system. mr trichet, thank you very much for your contribution. thank you for your attention. i wish you a stimulating and constructive discussion.