Global Financial Stability Report: Containing systematic risk and restoring financial soundness

The events of the past six months have demonstrated the fragility of the global financial system and raised fundamental questions about the effectiveness of the response by private and public sector institutions. While events are still unfolding, the April 2008 Global Financial Stability Report (GFSR- assesses the vulnerabilities that the system is facing and offers tentative conclusions and policy lessons. Some key themes that emerge from this analysis include: There was a collective failure to appreciate the extent of leverage taken on by a wide range of institutions-banks, online insurers, government-sponsored entities, hedge funds-and the associated risks of a disorderly unwinding. Private sector risk managements, disclosure, financial sector supervision, and regulation all lagged behind the rapid innovation and shifts in business models, leaving scope for excessive risk-taking, weak underwriting, maturity mismatches, and asset price inflation. The transfer of risks off bank balance sheets was overestimated. As risks have materialized, this has placed enormous pressures back on the balance sheets of banks. . Notwithstanding unprecedented intervention by major central banks, financial markets remain under considerable strain, now compounded by a more worrisome macroeconomic environment, weakly capitalized institutions, and broad-base deleveraging. In sum, the global financial system has undoubtedly come under increasing stains since the October 2007 GFSR, and risks to financial stability remain elevated. The systemic concerns are exacerbated by a deterioration of credit quality, a drop in valuations of structured credit products, and a lack of market liquidity accompanying a broad deleveraging in the financial system. The critical challenge now