reduced. as the cycle turns, lending criteria are tightened and firms will find it more difficult to finance their investments, which exacerbates economic fluctuations. 7. so, financial institutions ’ pro - cyclical behaviour is to some extent inevitable. the same holds for the role of regulation, which may strengthen pro - cyclicality : regulatory rules are more likely to become binding during unfavourable times. nonetheless, there are examples where we managed to soften this trade - off between sound risk management and procyclicality. one example is the new capital accord, basle ii, which requires banks to perform stress tests and demonstrate that they hold sufficient capital buffers above the regulatory minimum level when economic conditions are favourable. another example is the dutch financial assessment framework for pension funds, implemented last year. pension funds now have the possibility to make part of their liabilities conditional, allowing them to spread out shocks over 15 years. in addition, pension funds are required to use this long horizon when setting their premiums. this way, our defined benefit pension system has become more sustainable and at the same time less pro - cyclical. it is important that this carefully designed system will also be better acknowledged in the new ifrs accounting rules. we must avoid an overly rigid application of these rules, which should reflect the real risks and risk mitigants, and should therefore take into account the conditionality of dutch pension contracts. characteristics of the current crisis 8. it is too early to provide a thorough analysis of the causes and characteristics of the recent financial turbulence. apart from the fact that markets are still fragile, it will probably take several years before we are in a position to put these developments fully into perspective. nonetheless, even at this stage it is not hard to find similarities with earlier crisis episodes. in particular, there has been a structural change in the form of financial innovation. deregulation and liberalisation have created scope for new financial instruments and enhanced the mobility of risks. this is most clearly illustrated by the so - called “ originate - todistribute ” banking model, which has emerged over the past decade. by securitising loans, retail banks can focus on their role as originators, while other institutions such as investment banks specialise in bundling these loans into structured products that are then sold to investors. the benefits are clear : specialisation along the securitisation chain creates a more efficient financial intermediation process, in which risks can be priced and

at improving transparency and valuation. when publishing their upcoming mid - year reports, financial institutions should disclose their risk exposures according to a template in the fsf report. this is important to enhance consistency across firms. other proposals aim at improving accounting standards for off - balance sheet vehicles and strengthening guidance on the valuation of financial instruments. a specific set of recommendations focus on the role and uses of credit ratings. rating agencies should improve the quality of the rating process and avoid conflicts of interest in rating structured products. furthermore, these ratings should be differentiated from those of regular bonds, for instance by using a different rating scale. at the same time, investors should address their over - reliance on ratings. • several recommendations refer to the role of the official authorities. i already indicated that many of the risks that have manifested themselves were not a surprise ; to some extent, we saw this crisis coming. therefore, it is important to improve the translation of our risk assessments into action. this requires better information exchange between authorities and with the private sector. it involves improving cooperation between regulators and central banks but also cross - border ( e. g. supervisory colleges ). finally, crisis management arrangements need to be strengthened. this includes central banks ’ liquidity operations which must be more flexible, avoid stigma - effects and allow cooperation with other central banks ( e. g. by establishing swap lines and allowing cross - border use of collateral ). for most of these measures, it is not difficult to see how they influence incentives. remuneration structures, possible conflicts of interest and stigma - problems clearly have a bearing on the behaviour of market participants. 14. the fsf recommendations have been welcomed by the international financial community. but the real challenge is to implement them in such a way that the checks and balances in the financial system are restored so it becomes less prone to instability. in other words : we must get the incentives right. the netherlands is in a good position to implement the recommendations. our institutional set - up is helpful : the cooperation between central bank and supervisors is already ensured because they are combined in one institution. but we must avoid complacency ; the implementation of the fsf recommendations will be one of our top priorities in the next months. furthermore, even though we are on the right track, risks from the macro - financial environment have not disappeared. banks are going through a fundamental adjustment process, which needs time. financial markets, like the interbank money market, do not perform as they should and the