capital available to absorb shocks. conduits and sivs have no capital of their own, and they depend heavily on the liquidity support and credit enhancement from their sponsor banks, whose terms, and conditions, as i said, may market liquidity and short term credit : the financial crisis of august 2007 ; 3 september 2007. be variable and uncertain. and yet, they undertook maturity transformation on a significant scale. so those risks which materialized directly translated into liquidity shortage. conversely, the reason why most hedge funds weathered the shock – at least until now – may be that they managed to strengthen their capital base by imposing strict redemption rules to their investors. strong capital will not guarantee liquidity in all circumstances. there can be panics and sudden increases in the demand for liquidity. that's the job of central banks to help in those circumstances. but a strong capital base in the system – and in all its components – is likely to limit future liquidity shocks. in the period to come, central banks, regulators and market participants will debate on the ways and means to restore the securitized model on a robust and sound basis. the implementation of basel ii will bring significant improvements in the measure and management of risks. had it been into place some years ago, we may have avoided some of the problems we currently face. other evolutions in the regulatory environment and business practices may prove necessary. but, as i said, now is the time to analyze and think.

jean - pierre landau : some thoughts on securitization and financial turbulences remarks by mr jean - pierre landau, deputy governor of the bank of france, at the paris europlace, financial forum, new york, 22 october 2007. * * * there is a paradox in the current situation. however we measure it ( by the level of spreads or volatility ), the shock created in credit markets by losses on subprime loans is without precedent. and yet, the losses themselves, while significant and spectacular for some institutions, would not seem to pose a major risk to the health of the financial system. most notable, the turbulences occurred in a very favorable macro economic environment. this disproportion between the cause and the effect points to some existing fragilities – that need to be addressed – in the securitized model of capital markets. there is no rush to take measures, even less regulate. but there is no room for complacency either. rather, we need to come to a diagnosis and think of the desirable characteristics of a robust securitization model. the current model of securitization, as it has developed in the last decade, has two distinctive features : • one we were aware of : an increasing complexity of instruments, which combine an extensive use of derivatives with customization to individual investors'needs. this has made valuation and risk assessment more difficult. • one we rediscovered during the turmoil : the fragility of off - balance sheet structures and vehicles which underpinned securitization. conduits, especially sivs, were not built to absorb shocks. their relationships with sponsor banks are sometimes very ambiguous. there may be a gap between the legal commitments taken by the banks through liquidity support and credit enhancements, and the “ true ” level of responsibility they felt obliged to take to protect their reputation. this conjunction of complexity and fragility may have been too much for the system to bear. so it is worth to pause and ask ourselves whether we can eliminate those vulnerabilities and still keep the benefits associated with securitization, especially in terms of financial innovation. one good starting point is to look at the economic and financial rationale for securitization. securitization is meant to perform two functions : the first, and most " advertised " in recent years, is to allocate and distribute risks, hopefully to those agents and investors best equipped and most willing –