Wednesday, December 23, 2009

More Intelligence is Needed from (and for) Market Participants


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

Regulators intend to increase the flows of bilateral information so as to isolate sources of risk as well as the ability of market participants to improve their risk management and business models.

European Central Bank: Any well-functioning macro-supervisory framework needs the support of market participants, because a rigorous monitoring of systemic risks will require continuous market intelligence. Contact with market participants will be essential for detecting important trends, such as growing financial imbalances, convergence of business models, similarities in investment strategies and innovations in financial instruments – to name just a few.  It will be of immense value to establish a structured dialogue with the financial industry to this end. Anecdotal evidence will be of little relevance if there is no possibility to drill down to the sources of risk on the basis of well-founded information and a regular dialogue with market participants.  I understand that there may be concerns that this will impose an additional reporting burden on the industry. In my view, this should not happen. To the extent that macro-prudential oversight requires micro-prudential data, the latter should be available from supervisors, and full confidentiality will be ensured. Any additional reporting would be exceptional. …

There are likely to be benefits for the further enhancement of financial institutions’ internal models, including stress testing, notably by taking account of system-wide factors and macro-financial variables.  A better understanding of the concept and measurement of systemic risk will lead to more accurate indicators of aggregate leverage, correlation and concentration of exposures to specific asset classes and of a firm’s interconnectedness.  With a view to enabling better measurement of key elements in systemic risk analysis, it is the responsibility of financial institutions to continue to enhance the transparency and granularity of their individual reporting. This could improve, for example, individual firms’ assessment of counterparty risks. Better measurement will also allow for better management. Risk management decisions will be better informed. And financial institutions’ preparedness for specific risks will be enhanced.  [1]



[1] Mr Jean-Claude Trichet, President of the European Central Bank, London, 11 December 2009

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