21 April 2008

European Banks’ overview of financial crisis

The EBF recommends establishing an EU roadmap for dealing with a cross-border European bank crisis, underlining that co-ordination of efforts at national and European levels is crucial.

In the wake of the publication of the FSF recommendations, the EBF published its own considerations on the current financial crisis listing its preliminary recommendations on a number of key issues. These are published jointly with two papers on the rating of structured credit product and liquidity risk management.

European banks also underline that industry and market-led efforts are already under way, particularly with regards to transparency in structured credit markets. Policy makers should not rush conclusions on the effectiveness of recently-adopted capital rules before they are fully implemented. However, authorities should remain ready to act to re-establish normal functioning of the markets and be given strong political support.

Credit rating agencies will have to make significant improvements to their methodologies and enhance information policies in a number of areas, including in the area of conflict of interest management, EBF recommends. However, further regulation should not be considered as the shortcomings that have been identified cannot be explained by any element of non-compliance of CRAs with the Code and do not make the case for formal regulation. EBF also recommends that investors will have to self-assess their understanding of the meaning of ratings and review their use of ratings in their overall investment decisions.

As regards to the liquidity risk management EBF recommends that banks and authorities should focus more on liquidity stress testing in the context of the Pillar 2 review process. The regulatory framework should make sure that stress test scenarios are appropriately defined and that banks are able to cope with crisis situations if they arrive.

Also, valuation issues should be careful analysed to draw a complete and not misleading picture of the impact of the current market turmoil.

© Graham Bishop