10 December 2009

IIF report on reforming Financial Services Industry: strengthening practices for a more stable system

The Institute of International Finance makes clear in its report that strengthening risk management is a top priority. Specific areas of improvement include governance and transparency, stress testing, liquidity risk management, risk measurement and risk-aligned compensation.

   Key findings of the SCI report:

• Financial institutions have invested considerable resources in necessary improvements and significant changes are under way.

• Strengthening risk management is a top priority. Risk functions are being reconfigured and upgraded to give firms a more integrated approach to risk management. Specific areas of improvement include governance and transparency, stress testing, liquidity risk management, risk measurement and risk-aligned compensation.

• Institutional culture is changing, with a perceptible shift in orientation from ‘sales-driven’ to more ‘risk-focused.’

Firms are also formalizing their valuation reporting frameworks with increased involvement of senior management — including the CFO and CRO functions — in the valuation and reporting processes.

• Reforms are being embedded in firms whose managements increasingly recognize that reform needs to be a continuous process, aligned to changing market and regulatory developments.

Notwithstanding the improvements seen to date, the SCI has noted that the industry still has much to do. Introducing the requisite technology change and building more skilled and independent risk departments requires time and investment. Significant developments in information technology (IT) systems, especially for management information systems (MIS), cannot be rushed without creating new hazards. Therefore, although speed is important, it is essential to build systems sufficiently robust to ensure that changes made are real and enduring.

The CMBP Report made Recommendations in six areas, all of which were important in giving direction to firms and establishing benchmarks (Capitalized Recommendation and Principles refer to those in the CMBP Report). These are:

 

1. Risk Management

2. Liquidity Risk Management

3. Valuation Issues

4. Compensation Policies

5. Credit Underwriting, Ratings, and Investor Due Diligence in Securitization Markets

6. Transparency and Disclosure Issues

 

The report analyzes and provides insights on reforms undertaken in these areas by individual firms and by industry organizations and identifies challenges that remain. It provides a comprehensive review of how far the industry has come in the past two years in addressing weaknesses that contributed to the global financial crisis. In conjunction with the July 2009 IIF Report Restoring Confidence, Creating Resilience: An Industry Perspective on the Future of International Financial Regulation and the Search for Stability (Restoring Confidence Report), this report also offers private-sector views on recent regulatory developments.

 

Press release

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