Investors in structured credit assets, such as collateralised debt obligations, recently “realised they were much less informed than they originally thought”, according to US Federal Reserve governor Randall Kroszner.Speaking at the Institute of International Bankers’ annual breakfast in Washington, DC on October 22, Kroszner said the price discovery process for structured credit assets had fundamentally broken down in recent months. This stood in contrast to traditional equity and debt markets, which he believed had undergone a more straightforward risk reassessment.
Price discovery had failed in structured credit, he said, because investors had recognised these assets were more complicated than they first appeared. “The complex structures of innovative instruments, and the lack of transparency with regard to the underlying assets backing these instruments, made them more difficult and costly to value than many investors originally thought,” he said.
In addition to this, he suggested investors might not have done enough due diligence on such products, relying too heavily on credit ratings. “In these circumstances, it is not necessarily surprising that investors pulled back from purchasing certain instruments at any price.”
To reduce the chance of unanticipated losses in future, Kroszner said investors would need better resources to assess the risk of structured credit assets, especially in times of market stress. As this would increase the cost of investing, he speculated those involved in securitisation might make changes to the way they approach structured credit. “[They] may respond by reducing complexity, improving the quality of underlying assets, or increasing transparency and disclosure.”
Such calls are similar to those made by the chairman of the Washington, DC-based Institute for International Finance (IIF) and Deutsche Bank chief executive, Josef Ackermann, at the Institute’s 25th anniversary membership meeting on October 21. The IIF is setting up a committee to refine industry best practice in a number of areas, including transparency and disclosure, credit ratings, and valuation in thinly traded markets. The committee is expected to produce recommendations to the IIF by the first quarter of 2008, but the exact nature and scope of the proposals are as yet unclear.
More on Infrastructure
US regulatory concerns about liquidity of government securities collateral could be resolved by access to the Fed’s discount window, CCP officials say
High-frequency traders have been viewed with suspicion for some time. Now critics claim exchanges are conspiring with the traders to develop tools that benefit them and disadvantage ordinary investo...
The benefits of local trade repositories outweigh the possible disadvantages of multiple reporting requirements, says executive director of HKMA’s financial infrastructure unit
Sign up for Risk.net email alerts
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
Isda directors warn on fragmentation, access and liquidity - but expect problems to pass
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.