19 October 2007

FSF Preliminary Report on recent market turmoil

The FSF issued its preliminary report to the G7 Finance Ministers and Central Bank Governors on the recent financial market turmoil, pointing out to a number of weaknesses in financial markets.

The FSF has established a Working Group which will develop a thorough diagnosis of the causes of recent events, identify the weaknesses that merit attention from policymakers; and recommend actions needed to enhance market discipline and institutional resilience. The Group among others the following issues:

- With regard to risk management practices, the Group will examine and draw implications regarding firms’ liquidity and capital management practices, including with regard to contingent liquidity commitments and reputational risk, firms’ stress-testing practices, and their risk management frameworks for complex products and non-bank counterparties.

- On valuation, risk disclosure and accounting, the recent turmoil has exposed shortcomings in the transparency and valuation of complex products. The Group will examine where there is a need to promote improved transparency or other practices in these areas.

- Regarding the role of credit rating agencies, issues have been raised about potential conflicts of interest in activities of rating agencies, the role of credit rating agencies in the development of structured finance products and the uses made by investors of ratings of these products.

- Supervisors will need to consider some refinements to Basel II. The Group will also consider what lessons to draw for the regulation and supervision of liquidity management and off-balance sheet risk exposures, and will identify any other areas in which supervisory oversight might need to be adapted to strengthen the financial system.

The Group will also examine the tools and instruments available to central banks and supervisors in times of distress and coordination between them at the national and international level.

An interim report will be issued in early February 2008. A draft report is expected for late March 2008.

The final report is expected until 2008.

Full report

© Graham Bishop