One lesson from the crisis is the need for more effective systemic regulation. There has been a focus on who should exercise this responsibility. But the most critical question is what the systemic regulator should do, and what responsibilities will make it effective – not who, so much as how?

Regulators need to be able to identify risk concentrations early and prevent them from growing so large as to threaten the system. If systemic problems arise, regulators need to take prompt action to limit their impact and protect the safety of the system.

To do this, the systemic regulator must be able to see all the risks to which an institution is exposed and require that all exposures be clearly recognised. Consider off-balance sheet vehicles, such as Structured Investment Vehicles, which represented big sources of funding for many institutions. Many risk models ignored these activities, even though their sponsors had exposure to them. If existing and contingent liabilities, credit commitments and other exposures are not transparent, how can risk managers and regulators see all the risks an institution is exposed to?