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. Chapter 1 documents how the crisis is spreading beyond the U.S. subprime market - namely to the prime residential and commercial real estate markets, consumer credit, and the low- to highgrade corporate credit markets. The proliferation of new complex structured finance products, markets, and business models exposed the financial system to a funding disruption and a breakdown in confidence. Chapter 2 investigates in some detail how and why this set of instruments has had such an adverse effect on financial stability. Chapter 3 looks at the nexus between market liquidity (the ability to buy and sell an asset with a small associated price change) and funding liquidity (the ability of a solvent institution to make agreed-upon payments in a timely fashion). It finds that some new instruments may have increased the potential for adverse "liquidity spirals" in which market illiquidity leads to funding illiquidity and vice versa. The report concludes with a number of short- and medium-term recommendations relevant to the current episode. The immediate challenge is to reduce the duration and severity of the crisis. Actions that focus on reducing uncertainty and strengthening confidence in mature market financial systems should be the first priority.