06 June 2008

Fed Kroszner – financial markets will recover only gradually

The tenor in the financial markets has generally improved this spring and, on the whole, strains have eased somewhat, Kroszner said. However, US banks need still more new capital to put themselves and the economy on a more solid footing.

The tenor in the financial markets has generally improved this spring and, on the whole, strains have eased somewhat, Federal Reserve Governor Randall Kroszner said. US banks have raised more than $80 billion in new capital so far this year, but they need still more new capital to put themselves and the economy on more solid footing, he continued.

 

“While the recent ability of many financial institutions to raise capital from diverse sources has been encouraging, additional capital raising by financial institutions would support the extension of credit to households and businesses, and thus economic activity”, Kroszner said. Large financial institutions, especially in the United States and Europe, have reported credit losses and asset writedowns on the order of $300 billion.

 

“Despite the improvement in sentiment this spring, risk premiums in the bond and stock markets have remained wide by historical standards, suggesting that investors continue to be concerned about the economic outlook and the performance of specific industries and firms”, he said.

 

Strains in financial markets have eased somewhat but securitizations of non-agency mortgage products remain stalled and will recover only gradually, he noted. However, “rehabilitation in the mortgage securitizations markets will be a gradual process that will take time.”

 

Pointing to structured financial products he noted that “the more recent CDOs frequently were themselves backed by structured securities, resulting in so-called two-layer securitizations in which structured products are used to fund other structured products.”

 

“These two-layer securitizations are inherently more complex and more exposed to tail risk than their earlier one-layer counterparts”, he said. Many investors relied too heavily on CRA’s assessments and outlined four fundamental areas for improvements for risk-management: risk identification and measurement, liquidity risk management, valuation practices, and governance and risk control.

 

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