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Recent financial turbulences were the first “real magnitude” stress-test of today’s global financial system, ECB President Trichet said. “The sharpness and speed of the contagion to unrelated market segments revealed vulnerabilities with a nature and complexity that had not always been well understood.”
Speaking at the ICMA Annual Conference in
Trichet underlined that only a global response to the present turbulences can be effective. He underlined the strong consensus at international community level on implementing the FSF recommendations with determination and in line with the recommended timeline.
Immediate priorities are:
- Financial institutions should fully and promptly disclose their risk exposures, write-downs and fair value estimates for complex and illiquid instruments in their upcoming mid-year reporting. They should do so consistently with leading disclosure practices as set out in the FSF report.
- The IASB and other relevant standard setters should take urgent action to improve the accounting and disclosure standards for off-balance sheet entities and to enhance guidance on fair value accounting, particularly on valuing financial instruments in periods of stress.
- Financial institutions should strengthen their risk management practices, including rigorous stress testing, under the support of supervisors’ oversight. Financial institutions should also strengthen their capital positions as needed.
- By mid-2008, the Basel Committee should issue revised liquidity risk management guidelines and IOSCO should revise its code of conduct for credit rating agencies.
Furthermore, recommendations have to be implemented either by end-2008 or at the latest by 2009, namely revising capital requirements under Pillar I of Basel II, strengthening supervision and management of liquidity risk for banks, ensuring effective supervisory review under Pillar II, enhancing transparency and valuation, improving the quality of credit ratings for structured products, strengthening authorities’ responsiveness to risk and enhancing robust arrangements for dealing with stress in the financial system, he said.