Ernst & Young (E&Y) surveyed executives from the world's leading banks, including Australia's ANZ, Commonwealth, Westpac, NAB and Macquarie, to reveal the critical lessons learned from the financial crisis as it unfolded in the second half of 2008.

The report said the crisis exposed the financial community's most damaging weaknesses - vulnerabilities that respondents believe both contributed to and intensified the crisis.

Close to 90 per cent of banks believed the market seriously underestimated the paramount importance of liquidity.

"We can now see that this loss of liquidity was fuelled by an over-reliance on short-term funding, excessive optimism, poorly understood products and complacency," said E&Y Oceania leader of Banking and Financial Markets Steve Ferguson.

"The industry clearly recognises that it underestimated the difficulties of measuring and forecasting liquidity and that liquidity needs to be factored more fully into risk management."

Fostering a risk culture (73 per cent) and staying attuned to industry dynamics (60 per cent) were cited by respondents as imperatives, both for their institutions and for the banking industry as a whole.

Other weaknesses included forgetting the people factor - not ensuring they had skilled, seasoned risk and frontline professionals (40 per cent); not preparing for the unexpected (35 per cent); and an over-reliance on ratings agencies (23 per cent).

"These insights reveal that the banking sector has struggled to develop a consolidated view of risk across business units and various risk dimensions," Ferguson said.

"Respondents all recognised an urgent need for more robust risk forecasting and stress-testing."

- Mark Phillips