been closed with the introduction of basel ii. changes to the institutional framework but how can we change the institutional framework in order to avoid the mentioned frictions in the financial market and gain from the social benefits of crt? for more than one year, international institutions, central banks, and politicians have been working together on the lessons to be learnt from the financial crisis. at the summit on financial markets and the world economy held in new york in november of this year, the heads of state of the g20 agreed on “ common principles for reform of financial markets ”. international institutions, such as the imf or fsf, published valuable reports and recommendations on possible improvement of the financial architecture. furthermore, national central banks are contributing their expertise to the discussion. however, in order to achieve improvements in the financial architecture that substantially strengthen financial stability, an in - depth analysis of the underlying reasons for the crisis is essential. in this respect, the economic research that takes place at universities and various institutions is of great importance. for that reason, economic research should have a strong voice in the current debate. i therefore believe that events such as this conference are very important. but let me come back to my question about adequate changes to the institutional framework. as you can surely imagine, there are a great number of aspects that i could mention at this point. however, i fear that would go beyond the scope of my speech. i shall therefore confine myself to mentioning two measures, that are about to be taken. central counterparty ( ccp ) for otc derivatives – the first measure aims to enhance the transparency of the cds market by implementing one or more ccps for otc derivatives. the advantages would be a reduction in market participants ’ open positions due to netting as well as a better management and possible reduction of counterparty risk – for example, by guarantee funds or insurance schemes. in addition, the implementation of a ccp could be accompanied by disclosure requirements for cds positions of the originator. these requirements could also mitigate the just mentioned moral hazard problem in the case of forwarded credit risk via cds. as parlour and winton showed in their paper, reputation mechanisms may partly solve the problem of inefficient monitoring incentives of the originator. disclosure requirements are a prerequisite for such a reputation mechanism, as the market participants have to know the track record of the originator. regulators on both sides of the atlantic unanimously agree that there is a need for the implementation of

axel a weber : risk transfer – challenges for financial institutions and markets dinner speech by professor axel a weber, president of the deutsche bundesbank, at the joint bundesbank - cepr - cfs conference “ risk transfer : challenges for financial institutions and markets ”, frankfurt am main, 11 december 2008. * * * introduction ladies and gentlemen i wish to extend a warm welcome to you at this conference dinner on the occasion of the joint bundesbank - cepr - cfs conference here in frankfurt. the many aspects of credit risk transfer ( crt ) that you addressed in your research papers – from the pricing of subprime mortgage risk through to counterparty risk in financial contracts – reveal just how broad and complex this topic is. and the current financial turmoil provides striking confirmation of how relevant this topic is, as crt may adversely affect financial stability. the different forms of crt are playing a key role, not least in the world wide discussion on regulatory responses to this crisis. i therefore believe that this conference presents a great opportunity for you as researchers to exchange your findings and views on risk transfer. however, i also hope that it makes a contribution to the current search for an adequate regulatory framework for the financial markets. in my following remarks, i would like to comment briefly on crt in the recent crisis and on some measures that are about to be taken. credit risk transfer ( crt ) in the recent crisis when analysing an economic event such as the current financial crisis, it is usually very helpful to consult some economic theory. in the case of crt general economic theory tells us that crt is, in principal, beneficial. first, it may lead to a better risk allocation as it disconnects the originator of a risky asset from the ultimate risk taker. second, referring to a result of the model by hakenes and schnabel presented at this conference, better risk allocation provides scope for socially beneficial projects that, otherwise, would not have been financed. finally, as the basel committee on banking supervision points out in the joint forum on credit risk transfer ( 2008 ), “ crt has made the market pricing of credit risk more liquid and transparent ”. however, in the current financial crisis different methods of crt applied by financial institutions have made for negative headlines in the newspapers : securitisation – financial institutions ( for example, ikb ) that were engaged in the american mortgage market through financial products such as rmbs suffered