Post mortem overload

Reading, digesting and implementing the many suggestions, guidelines and rules in the wake of the credit crisis is becoming a full-time job. To name the sources of just a few: the President's Working Group on Financial Markets, the US Treasury, the International Organisation of Securities Commissions, the Financial Stability Forum, the Senior Supervisors Group, the Institute of International Finance and, most recently, the Counterparty Risk Management Policy Group.

The recommendations within these reports are many and wide-ranging, from the valuation of structured credit products and rating agency practices, to liquidity risk management, derivatives infrastructure and regulatory capital charges. Many of the recommendations overlap - begging the question why there couldn't have been slightly more co-ordination in regulatory responses.

But one of the interesting themes to emerge from the various reports is the role of the risk management function within banks, how it liaises with senior management, and how models and quantitative analysis are used. Some banks, it emerges, put too much onus on key risk management metrics, not asking basic questions about gross exposures or challenging assumptions. The idea of banks' boards of directors, in some cases with little capital markets experience, leafing through value-at-risk reports - and potentially making business decisions off the back of these numbers - is, frankly, alarming.

Others didn't pay enough attention to internal pricing models, putting too much reliance on ratings, dealer quotes and pricing services to value structured credit holdings. As a result, a number of banks built up sizeable super-senior collateralised debt obligation warehouses without having a clear idea of the risks involved, or the tools at their disposal to manage this risk.

Some, meanwhile, did have the right models and processes in place, but either didn't believe the results or blatantly ignored them. Anecdotal stories are circulating about risk managers approaching senior managers in 2006 with the results of stress tests based on a hefty drop in the US housing market, and being laughed out of the room.

Clearly, there's no single failure or weakness that can be identified. There were lots of moving parts to this crisis, with seemingly unconnected factors combining to create the mother of all market dislocations - hence, presumably, the sheer volume of reports into the causes of the crisis. The benefit of the recent soul-searching is that risk management will have more clout and resources, while senior management will be more questioning of valuations and risk management figures. But it still would have been nice if regulators could have got together, trawled through the causes, and outlined their recommendations in a manageable number of documents.

Nick Sawyer, Editor.