Speaking at the Frankfurt European Banking Congress Jean Claude Trichet, President of the ECB, outlined some first provisional lessons which can already be drawn from the subprime market turbulences.
Pointing on the role rating agencies play in structured credit markets he noted that “some investors may also have misinterpreted the risk dimensions covered by a rating. Against this background there is probably scope to improve the information content of ratings and to make the monitoring process more transparent.”
He also called banks to further strengthen their liquidity risk stress-tests, encompassing for example scenarios such as a protracted closure of a broad range of securitisation markets and the drawing of contingent liquidity obligations by commercial paper programmes. “Moreover, those elements should also be incorporated into their contingency funding plans. The ECB, together with the ESCB Banking Supervision Committee, is carrying out work on this important topic.”
Mr Trichet also underlined the need to reflect carefully on the “originate-and-distribute” business model. “The transfer of credit risk outside the banking sector may ultimately not be effective”, he said
Other lessons include:
- the growing complexity of instruments has to be monitored very closely.
- structured credit markets provide a pressing example of the need to increase transparency in financial markets.
- the turmoil has revealed some challenges for the liquidity management of banks.
- the operational framework of the Eurosystem has proved able to cope with stressed market conditions.
Full speech
© Graham Bishop
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