“We are considering the establishment of a Capital Markets Monitoring Group of approximately 10 to 20 highly respected experts and eminent leaders of finance to alert the industry to actual and potential vulnerabilities and market developments that pose systemic risks,” Mr Ackermann suggested when presenting the IIF Interim Report.
The IIF will recommend a suite of best practices to be embraced voluntarily, perhaps in the context of a “code of conduct” to reform banking practices. Events have raised questions about the ability of certain Boards properly to oversee senior managements and to understand and monitor the business itself, the IIF interim report says.
The report states that industry must raise standards that will be applied rigorously in all firms and to all products. In so doing, it must strengthen risk management within firms and also with respect to conduits and other vehicles; revise incentive structures; enhance transparency of the rating system; provide more useful disclosure; and address the valuation problems faced in a mark-to-market world in times of low liquidity, which exacerbates volatility.
With regard to Basel II, the resolution of home-host issues will be even more important in the new environment, but the dialogue with the supervisors about the cross-border application of Pillars 2 and 3 is far from complete. Recent experience of international market stresses has shown a clear need to enhance coordination through home supervisors and to minimize stand-alone regulation of subsidiaries.
The report also recommends that incentive compensation models should be better aligned with shareholders’ interests and long-term, firm-wide profitability. The same principles should apply to severance packages, Mr Ackermann said.
On Rating Agencies the IIF Committee recommends that ratings models should be consistent with industry-developed standards and subject to independent review and external validation, not unlike the review and validation that exist for the internal ratings and risk methodologies at banks.
On the valuation of complex structured products the IIF proposes a top level technical dialogue among firms with auditors, rating agencies, investors, analysts and supervisors to address many of the limitations in the current mark-to-market system.
The final recommendations should be available in summer 2008.
Press release
© Graham Bishop
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