problems with troubled assets at an early stage? ” i find the answer is unfortunately negative : “ it is very difficult ”. this is because when the valuation of troubled assets becomes highly uncertain, in the way frank knight described here in chicago eighty - some years ago, a “ wait and see ” strategy may be the natural reaction for both sellers and buyers 1. so, private initiatives alone may not be sufficient to solve the problem. we have a list of such private attempts, with the fate of the m - lec among them, as well as the cooperative credit purchase corporation in japan in 1993. at the same time, it becomes increasingly difficult and costly for financial institutions with troubled assets to raise capital once the market becomes suspicious. however, governments usually face severe difficulty gaining public support for intervention in the early stages of a crisis, as we have seen recently, while the financial institutions themselves seek to avoid stigma and government interference. 4. lesson four what is the core of the problem? lesson four of the crises is that it is the difficulty in getting “ reasonable estimates ” of losses and a “ reasonable pricing ” of troubled assets, on which both see nishimura, k. g., and h. ozaki, “ irreversible investment and knightian uncertainty ” journal of economic theory 136 ( 2007 ), pp668 - 694. sellers and buyers can agree, that leads to erosion in confidence. it is this erosion in confidence which then leads to an “ excessive ” aversion to uncertainty. there are a number of related factors which have contributed to the current erosion in confidence. firstly, troubled assets have had macro - systemic effects, including unprecedented levels of downside - correlation. secondly, these troubled assets ’ losses were dynamic and evolved over time. the “ estimated losses ” increased continuously as the economy slid into stagnation. valuation of these assets, based on pre - crisis norms, grossly and consistently underestimated the losses, leading to an erosion of confidence in valuation methods and ultimately in the solvency of the institutions with these assets. moreover, troubled assets were very heterogeneous, and the erosion of confidence in existing valuation methods set an adverse selection mechanism in motion, leading to a marked deterioration in market liquidity. let me briefly summarize the implications of erosion ( or contamination ) of investors ’ confidence in financial institutions. once they lose confidence, these investors face “ unknown unknowns ” that they never dreamed of before. they then become “

the legislature considered that, in a small country like ours, whose human and material resources are bound to be limited, the way to achieve significant reinforcement of the resources allocated to financial stability is to develop substantial synergy between the various institutions concerned, in order to achieve the maximum economies of scale and to take the resources thus released and reallocate them to the basic functions of each institution. the law of 2 august 2002 provides that the rules governing the arrangements for pooling resources must be set out in a protocol concluded between the institutions concerned and approved by the king. without waiting for the official inauguration of the fsc, its members have agreed on a framework for exploiting synergy and have submitted proposals to the minister for achieving greater cooperation in regard to prudential policy and various support activities. the fsc has also set up a number of priority projects for the coming months, in particular the launch of a national coordination initiative on the subject of business continuity, which will take account, in particular, of the lessons which can be drawn from the events of 11 september 2001. in conclusion, i would simply say that this new committee and the far more historic institutions from which it emanates are firmly resolved that they will actively seek the solutions best suited to the general interest in the field entrusted to them, namely the field of financial stability.