Financial turmoil reports issued by the CGFS

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BASEL – The Committee on the Global Financial System (CGFS), which monitors and examines broad issues relating to financial markets and systems with a view to elaborate policy recommendations to support the central banks, has published three reports analysing the financial market turmoil that began in summer 2007.

The papers cover private equity and leveraged finance markets; ratings in structured finance, looking at what went wrong and what can be done to address the shortcomings; and central bank operations in response to the financial market turmoil.

Donald Kohn, chairman of the CGFS, says these reports highlight the role the Committee has played during the market turbulence to inform central banks' assessments of risks to financial stability and provide appropriate policy recommendations. Earlier versions of the reports on central bank operations and credit ratings in structured finance served as input for the April 2008 Financial Stability Forum report to the G-7 finance ministers and central bank governors.

Private equity and leveraged finance markets was prepared by a working group chaired by Henk Brouwer of the Netherlands Bank. It was written against a backdrop of rapidly deteriorating conditions in leveraged finance markets and addresses two broad questions: What have been the important trends during the period of rapid growth in the markets for leveraged finance, private equity and leveraged buyouts, and how has market growth affected corporate finance? And how have leveraged finance markets performed since mid-2007, which risks have surfaced, and what preliminary lessons can be drawn for financial stability?

The report highlights a number of risks, including short-term risks associated with the unwanted expansion of arranger banks' balance sheets due to undistributed leveraged loans, medium-term risk resulting from the refinancing needs of highly leveraged corporations and long-term risks for the availability of leveraged finance.

The Ratings in structured finance: what went wrong and what can be done to address shortcomings? paper was prepared by a CGFS study group led by the Bank of England’s Nigel Jenkinson. The report draws on the lessons learnt during the turmoil about the vulnerabilities of ratings of structured finance products. While emphasising that credit rating information should support, not replace, investor due diligence, the report provides a number of specific recommendations on how the information provided on ratings of structured finance products could be improved. It also includes a summary of the feedback received during a consultation process with credit rating agencies and investors. A number of initiatives to enhance the information provided on structured finance ratings are already under way. In the light of these initiatives, the CGFS will follow up with credit rating agencies and investors on the recommendations made in the report.

The final report, Central bank operations in response to the financial market turmoil, examines how central banks have adapted their liquidity operations in response to the money market tensions that emerged during the turbulence. The report was prepared by a study group, chaired by the European Central Bank's Francesco Papadia, which included senior central bank market operations experts from seven major currency areas.

The report discusses the various measures taken by central banks, assesses the outcome of these measures and sets out seven recommendations for central bank liquidity operations. The report was drafted during a time when central banks were closely monitoring market developments and, more or less simultaneously, needed to respond to the evolving challenges. Some of the specific recommendations discussed by the study group had already been implemented during the drafting period.

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