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Senior financial supervisors from five countries issued a report that assesses a range of risk management practices among a sample of major global financial services organizations.
The report identifies a number of risk management practices that may be associated with negative or positive performance to date.
“The predominant source of losses was the firms’ concentrated exposure to securitizations of
Also, some firms failed to price properly the risk that exposures to certain off-balance-sheet vehicles might need to be funded on the balance sheet precisely when it became difficult or expensive to raise such funds externally.
Finally, the report finds that firms that avoided such problems demonstrated a comprehensive approach to viewing firm-wide exposures and risk. In addition, management of better performing firms typically enforced more active controls, the report states.
Based on these observations, supervisors have identified the following areas for further work.
First, strengthen the efficacy and robustness of the Basel II capital framework by:
- reviewing the framework to enhance the incentives for firms to develop more forward-looking approaches to risk measures (beyond capital measures) that fully incorporate expert judgment on exposures, limits, reserves, and capital; and
- ensuring that the framework sets sufficiently high standards for what constitutes risk transfer, increases capital charges for certain securitized assets and asset-backed commercial paper liquidity facilities, and provides sufficient scope for addressing implicit support and reputational risks.
Second, the need to strengthen the management of liquidity risk through the international fora.
Third, national supervisors will review and strengthen existing guidance on risk management practices, valuation practices, and the controls over both.
Fourth, support efforts in the appropriate forums to address issues that may benefit from discussion among market participants, supervisors, and other key players (such as accountants). One such issue relates to the quality and timeliness of public disclosures made by financial services firms and the question whether improving disclosure practices would reduce uncertainty about the scale of potential losses associated with problematic exposures. Another may be to discuss the appropriate accounting and disclosure treatments of exposures to off-balance-sheet vehicles. A third may be to consider the challenges in managing incentive problems created by compensation practices.
The seven supervisory agencies participating in this project are the French Banking Commission, the German Federal Financial Supervisory Authority, the Swiss Federal Banking Commission, the U.K. Financial Services Authority, and, in the United States, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Federal Reserve.
Summary letter to the Financial Stability Forum
Observations on Risk Management Practices during the Recent Market Turbulence