The ongoing global financial crisis is rooted in a combination of factors common to previous financial crises and some new factors. The crisis has brought to light a number of deficiencies in financial regulation and architecture, particularly in the treatment of systemically important financial institutions, the assessments of systemic risks and vulnerabilities, and the resolution of financial institutions. The global nature of the financial crisis has made clear that financially integrated markets, while offering many benefits, can also pose significant risks, with large real economic consequences. Deep reforms are therefore needed to the international financial architecture to safeguard the stability of an increasingly financially integrated world.

During the current global financial crisis, failures have surfaced in macroeconomic policies and the regulation and supervision of banks and non-banking institutions. It is now clear that agencies involved in regulation, supervision, and crisis management did not always have clear mandates and tools commensurate with these mandates, and that there was a lack of international consistency and coherence of policies. The global financial crisis has also led to a reconsideration of the benefits and costs of open financial markets, leading to calls for a reassessment of the global financial architecture. This paper draws lessons from the recent financial crisis for reforming financial systems, including lessons for macroeconomic policy, financial regulation, and the global financial architecture. To properly diagnosis the problem, the paper starts with a review of the causes of the current global financial crisis, drawing on historical perspectives and discussing especially its international dimensions. It highlights the multiple causes of the crisis, with a mixture of many elements common to other financial crises and some new elements. It reviews the many channels and mechanisms through which the financial crisis propagated and spread globally. And it shows how the ongoing global crisis is leaving a considerable legacy of government interventions and macroeconomic consequences, especially in advanced countries, which will condition future actions and reforms.