26 March 2008

Trichet calls for further significant change of culture

“Financial institutions will need to step up their efforts to effectively manage the risks that may lie ahead”, ECB President Jean-Claude Triched said speaking before the EP ECON Committee. “With the global financial system undergoing a process of de-leveraging, the euro area financial stability outlook continues to be clouded by considerable uncertainty.”

“Considerable uncertainty still remains about the reliability of total cost estimates and about how the costs will eventually be spread.

“There is also uncertainty about the possibility of feedback effects onto the financial system, including questions about what the ultimate impact on the intermediation of credit – both through financial institutions and markets – will be.

“Moreover, until conditions in the US housing market show signs of improvement, the possibility of continuing tensions in structured credit markets cannot be excluded.

Responses to the current situation:

First, with regard to improving disclosure and valuations of structured finance products, financial institutions are called upon to promptly and fully disclose on- and off-balance sheet risk exposures. Moreover, guidance is warranted by auditors and supervisors with the aim of enhancing the clarity and robustness of structured product valuations, particularly in relation to illiquid assets.

Second, credit rating agencies, whilst eliminating conflicts of interest, should take measures to expand the scope of information provided to investors – thus facilitating their exercise of due diligence, while improving governance and rating methodologies. If their endeavours will not prove to be adequate, public policy action would need to be considered.

Third, supervisors should ensure that banks retain adequate capital and liquidity buffers. In this context, work is underway to refine certain aspects of the capital adequacy framework, especially in relation to the treatment of securitisation and off-balance sheet exposures. Moreover, further supervisory guidance needs to be developed for liquidity risk, incorporating the lessons from the turmoil and focusing on liquidity stress-testing and contingency funding plans.

Trichet finally called for a further significant change of culture at the national, European and global level towards enhanced transparency and anti-cyclicality as a large number of rules, regulations and procedures have a tendency to foster behaviour that is largely procyclical, amplifying the booms as well the busts in the cycle.

Full speech Trichet

For the discussion in ECON Committee see:

Home>Edited Minutes of key legislative Bodies>ECON meetings (link)

© Graham Bishop