A new financial architecture: the Issing Committee corralled some of the best minds in banking and financial supervision. Here's what they concluded.

In an environment of inadequate regulation and gaps in supervisory oversight, inappropriate incentive structures have encouraged the production of complex financial instruments supported by high degrees of leverage. The situation in booming financial markets became more and more unsustainable, needing only a trigger to collapse. This trigger was delivered when house prices in the United States started to fall with the expectation that this would continue for an extended period of time.

INTELLIGENT TRANSPARENCY: THE RISK MAP

In the current crisis, central banks, supervisors, and deposit insurers were not fully aware of the extent, the interconnectedness, and the systemic risks emanating from the shadow banking system that had evolved over the past several years, comprising off-balance sheet entities as well as risk transfer instruments like collateralized debt obligations and credit default swaps. A coordinated effort to set up a suitable database of the global financial interconnectedness and its major risk factors is needed. We call this "intelligent transparency," and propose creation of a Risk Map.

Participating agencies with regional expertise, chaired by the International Monetary Fund, should develop a proposal defining the conceptual back-bone of the Risk Map project. Since data analysis alone does not suffice to spur appropriate market discipline and trigger interventions by regulators, a pre-arranged link is needed between the results of the data analysis and a set of policy actions.

Investors need enough information to be able to assess the risks of financial instruments correctly. In securitization transactions, the economic first loss position must be described and its allocation in the market treated as a bond covenant, disclosed to the market, thereby avoiding opaqueness of bank portfolio risk.

CREDIT REGISTRY

Given the current high level of international lending and exposures, a global credit register would greatly enhance risk management, both at the firm level and at the systemic level. Similarly, a unified approach to exposures in areas such as bonds and stocks would add the international capital market dimension to the picture of corporate and bank risk exposures. Credit register information extends the information aggregated under the Risk Map project in the direction of major bank borrowers.

We propose a centralized approach to setting up a standardized credit register that is capable of mapping domestic and...