International regulators release risk management report
US, UK, French, German and Swiss supervisors issue risk management guidelines
NEW YORK – International regulators have released risk management guidelines in an attempt to promote higher industry standards and reduce market reliance on the credit rating agencies. The report was triggered by a request from the Financial Stability Forum.
The seven participating supervisory agencies are the US Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, the UK Financial Services Authority, the French Banking Commission, the German Federal Financial Supervisory Authority and the Swiss Federal Banking Commission.
The report, Observations on Risk Management Practices during the Recent Market Turbulence, is based on a joint review of current risk management practices held by regulators last autumn and a round table held between supervisors and industry representatives in February.The report’s key observations and proposed supervisory responses were summarised in a transmittal letter to the chairman of the Financial Stability Forum, Mario Draghi, which stated that the predominant source of losses for firms in the survey through year-end 2007 was the firms’ concentrated exposure to securitisations of US subprime mortgage-related credit that was exacerbated by the fact that some firms made strategic decisions to retain large exposures to super-senior tranches of collateralised debt obligations that far exceeded their understanding of the inherent risks, which they then failed to mitigate or control.
Firms also underestimated their liquidity needs and control over their balance sheets, as some were found to have failed to price properly the risk that exposures to certain off-balance-sheet vehicles might need to be funded on the balance sheet at the same time that it became difficult or expensive to raise such funds externally.
Firms that avoided these problems, says the letter, did so due to having a comprehensive approach to viewing firm-wide exposures and risk, and had more adaptive risk measurement processes and systems that were flexible enough to adapt to a rapidly altering market. These firms, says the letter, “also relied on a wide range of risk measures to gather more information and different perspectives on the same risk exposures and employed more effective stress testing with more use of scenario analysis”.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Prop shops recoil from EU’s ‘ill-fitting’ capital regime
Large proprietary trading firms complain they are subject to hand-me-down rules that were originally designed for banks
Revealed: the three EU banks applying for IMA approval
BNP Paribas, Deutsche Bank and Intesa Sanpaolo ask ECB to use internal models for FRTB
FCA presses UK non-banks to put their affairs in order
Greater scrutiny of wind-down plans by regulator could alter capital and liquidity requirements
Industry calls for major rethink of Basel III rules
Isda AGM: Divergence on implementation suggests rules could be flawed, bankers say
Saudi Arabia poised to become clean netting jurisdiction
Isda AGM: Netting regulation awaiting final approvals from regulators
Japanese megabanks shun internal models as FRTB bites
Isda AGM: All in-scope banks opt for standardised approach to market risk; Nomura eyes IMA in 2025
CFTC chair backs easing of G-Sib surcharge in Basel endgame
Isda AGM: Fed’s proposed surcharge changes could hike client clearing cost by 80%
UK investment firms feeling the heat on prudential rules
Signs firms are falling behind FCA’s expectations on wind-down and liquidity risk management