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The Committee on the Global Financial System (CGFS), which is a monitoring body for the world's central bank governors, has released a report entitled "The Functioning and Resilience of Cross-Border Funding Markets" prepared by a joint Study Group of the CGFS and the Markets Committee. The Group was chaired by Guy Debelle of the Reserve Bank of Australia.

The report examines the funding market disruptions during the recent financial crisis, reviews the policy responses and distils the following lessons:

• The build-up of maturity mismatches by internationally active banks was a major vulnerability and should be better monitored and managed. The principal threat to stability was not cross-border activity itself, but the inadequate recognition and management of the related risks, especially those arising from reliance on short-term funding and exposure to potentially illiquid assets.

• The crisis did, however, highlight the resilience of the foreign exchange markets, which continued to function despite severe pressures. While initiatives to upgrade market infrastructure should be welcomed, care should be taken not to let reform efforts inadvertently undermine markets that have proved to function well.

• The immediate policy responses, including central bank swap and repo lines and the use of own foreign exchange reserves, were effective and appropriate for this episode. In other situations, different policy tools might prove more suitable. Policymakers should continue to explore other viable options so that they can respond flexibly in different crisis scenarios.

CGFS Chairman Donald L Kohn and Markets Committee Chairman Hiroshi Nakaso say the report would serve as a relevant and timely input to the ongoing debate about policy actions to address cross-border funding liquidity risks.

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