08 August 2008

CRMPG III report on reform of systemic risks

Some of the world’s biggest banks are proposing reforms responding to the credit crisis. The proposals would limit the number of investors of complex financial products, and complements official oversight to contain systemic risks.

Responding to the credit crisis some of the world’s biggest banks, including JPMorgan Chase, Merrill Lynch, Citigroup, HSBC, Lehman Brothers and Morgan Stanley, are proposing reforms that would limit the size and scope of their businesses. The proposals would hold down the number of investors who can buy complex financial products, bring large swathes of the derivatives markets into regulators’ sights and call on banks to spend more on technology and risk management.

 

The report is an integrated framework of private initiatives that will complement official oversight to help contain systemic risk. The Policy Group focused on four key areas, which it deemed the most important and timely and were the areas in which the Policy Group believed it could make the greatest contribution.

Those areas include:

• a reconsideration of the standards for consolidation under US GAAP of entities currently off-balance sheet coming on-balance sheet;
• measures to better understand and manage high-risk financial instruments;
• significant enhancements to risk monitoring and management; and,
• a series of sweeping measures to enhance the resiliency of financial markets generally and the credit markets in particular, with a special emphasis on OTC derivatives and credit default swaps.

 

The report also highlights important "emerging issues," which will require close attention in the period ahead.

The Report further lays out five "Core Precepts," which the Policy Group regards as relatively simple, readily understandable and forward-looking standards upon which the management of large integrated financial intermediaries must rest.

 

Press release

Executive Summary

Full report

© Counterparty Risk Management Policy Group