that liberal and unsubstantiated valuation assumptions can result in material inaccuracies in financial statements and substantial write - downs of structured products, and in case of excessive concentration, even demise of the sponsoring institution. supervisors and banks, therefore, need to understand the potentially significant effect that market volatility on the financials of a bank. residual risks in structured products there was insufficient recognition of residual risks in the structured products on the part of investing banks, as well as those banks acting as issuers and sponsors of asset - backed commercial paper ( abcp ) programmes. for instance, banks that extended liquidity facilities to abcp programmes were exposed to high degrees of credit risk, of the underlying asset pool, which may be subtly embedded within the liquidity facilities'provisions. securitisation exposures can also expose banks to significant reputational risks, as observed in the recent episode, on account of which the banks had to roll - in the sivs on to their own balance sheets. supervisors and banks, therefore, need to take cognisance of the residual risks entailed in structured products. transparency and disclosure the recent difficulties experienced by banks as well as investors, with respect to complex structured products highlighted the lack of transparency due to insufficient disclosure. much of the current turmoil in the credit markets related to questions about the soundness of certain types of collateralised debt obligations ( cdos ) and asset - backed commercial paper. these problems might perhaps been avoided, or at least mitigated, through greater transparency, particularly with respect to the exposures of some large international institutions to cdos of securities backed by sub - prime mortgages originated in the united states. regulatory scope in view of ever - increasing integration of different segments of the financial market, the potential of the unregulated market participants for infecting the regulated parts of the system, no matter how well supervised, needs better recognition by the financial supervisors. the regulatory gaps in which the unregulated entities operate need to be identified and effectively addressed so that the systemically - important regulated entities are not put to undue risk by the activities of the unregulated entities, entailing significant public cost. employee - compensation structure the remuneration structure of the employees is also stated to have played a role in the recent crisis. the pay structure was flawed in as much as the employee bonuses formed a large part of the entire remuneration package. the performance - based remuneration

in the usa had been fuelled by an ongoing benign interest rate environment, which made the home mortgages affordable to many borrowers, with limited means, for acquiring homes. however, the credit intermediaries did not appear to have factored - in the impact pf potential changes in the macroeconomic / interest - rate environment in their credit assessments of such borrowers and on their repaying capacity. it is reported that the lenders also enticed the home loan borrowers through “ teaser rates ”, which were artificially low interest rates, valid only for a limited initial period. there was wide - spread adoption of the “ originate - to - distribute ” model by the credit / banking institutions under which the loans were granted not with the objective of holding till maturity but for securitising them rapidly. such an approach tended to weaken the incentives of the lenders for ensuring rigorous due diligence at the credit appraisal stage – as they were content in the knowledge that the asset would not remain on their balance sheet for long. this, in turn, led to assumption of significant amount of credit risks by the lenders on low - quality / sub - prime counterparties, and acquisition of low - quality assets, which were subsequently securitised. the credit intermediaries also resorted to large - scale reliance on credit - risk transfer ( crt ) instruments, including securitisation structures, which enabled the hiving off of such exposures to a variety of special purpose vehicles through issuance of securitised paper, mortgaged backed securities and structured finance products. such risk transfer resulted in the investors in such products getting farther and farther removed from the underlying risks on the borrowers whose loans had been securitised and the investors did not know the real nature of risk and where the risk actually resided. also, the ready acceptance of the securitised products by the investors such as hedge funds, asset managers, structured investment vehicles ( sivs ) and other specially designed conduits in various segments of the market led to a wide dispersal of the underlying credit risk to a larger investor universe that was not necessarily better equipped than the originating lenders to assess the underlying credit risks. the provision of liquidity - support commitment by the banks to the structured investment vehicles ( sivs ) was yet another factor that exposed the banks to the liquidity risks faced by the sivs. the sivs encountered the liquidity squeeze when they could not roll