Download The Financial Crisis and Information needed for Financial Stability

The Financial
Crisis and
Information Needs
for Financial
Surveillance
Christopher Towe
Deputy Director
Monetary and Capital Markets
Department
International Monetary Fund
Lessons from the Crisis
• Information gaps were extreme:
– Limited data on risk exposures
• Partly due to expansion of intermediation through
unregulated channels and new instruments
– Gaps in information content
• Indicators gave misleading signals, blunting early warning
– Unanticipated financial system and cross-border
networks and interdependencies
• amplified the reach and severity of the crisis for financial
systems, the real economy, and internationally.
• As a result, even the doomsayers had difficulty
in making their cases convincingly
Key gaps—Financial Innovation
• Rapid innovation and growth in new areas:
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Complex structured products
Off-balance sheet entities
Trading books of banks’ balance sheets
Over-the-counter derivative markets
Non-bank financial intermediaries
• Investment banks, insurance companies, hedge funds,
mortgage broking
• These markets and instruments had limited
history, disclosure requirements, and data
• And were lightly regulated
Key Gaps—Major Banks
• Gaps related to rapid growth of commercial and
investment bank lending:
– Use of complex structured products and off balance
sheet entities
• Contributed to overestimation of risk transfer
– Lack of consistency and transparency in
disclosures, especially in their granularity
• Undermined risk assessments, at an institution level and
systemically
– Insufficient data on cross-border exposures and
capital flows
• Hampered analysis of cross-country spillovers
Key Gaps—Asset Valuation Techniques
and Risk Modeling
• Flawed calibration
– Based on benign segment of the credit cycle
– Inadequate basis for assessing discontinuities during
crises;
• Fractional coverage
– Models often applied to only a portion of portfolios
– Limited consideration of interaction between market,
liquidity, credit and reputation risks;
• Heterogeneous risk modeling across institutions
– Complicated supervisory oversight
Key Gaps—OTC Instruments
• Gaps in information related to lack
centralized clearing and exchange
– OTC transactions not tracked
– Unclear counterparty risks
– Lack of netting
• But risk layering also led to opacity
– With regard to underlying risk of the
instrument
– And who bore the risk
Key Gaps—Non-Banks
• The crisis exposed a lack of information
on:
– Money market funds, insurance companies,
mortgage brokers, pension funds, and hedge
funds
– Including with regard to exposures, leverage,
and maturity mismatches
– Their inter-connectedness has also been
shown to be source of vulnerability
Key Gaps—Information Content
• Some financial soundness indicators (FSIs) performed
poorly as early warning indicators
– E.g., CAR and liquidity indicates continued to indicate
soundness even as financial conditions deteriorated;
– Others, such as sectoral leverage, provided better early warning,
but data collection was incomplete.
• Market indicators also failed
– Driven by contemporaneous information
– Risk and volatility measures were at historic lows prior to crisis.
• Macro-prudential modeling proved inadequate, and did
not address:
– systemic risks,
– spillover effects, and
– network effects
Initiatives Are Underway
• Enhanced disclosure for banks under Basel II Pillar 3
(BCBS);
• Improved disclosure of structured products (project
START);
• Revised reporting requirements for off balance sheet
entities (IASB);
• Centralized clearing for CDS (FRBNY) and disclosure of
transactions data (DTCC);
• Enhanced disclosure by rating agencies (IOSCO);
• Improved disclosure by hedge funds to investors/clients
and counterparties (HFWG)
• Economic Statistics Initiatives
• Debt securities (Working Group on Security Databases)
• Improved cooperation (Inter Agency Group on Economic and
Financial Statistics)
But there is more to be done…
R1: Strengthen disclosure standards of banks and
systemically important NBFIs;
R2: Reprioritize Financial Soundness Indicators;
R3: Develop data and tool set for analysis of
system wide risks;
R4: Strengthen disclosure and information
exchange on assessments of complex
models;
R5: Improve transparency in OTC derivative
markets.
R1: Systemically Important Institutions
• Large banks
– Disclose market positions, exposures to economic sectors, large
counterparties and countries, off-balance sheet activity, and the
banking and trading books;
– Using common templates across countries to permit
aggregation, institutional comparison, and identification of
network links;
• Systemically important NBFIs
– Lesser requirements but should disclose leverage, maturity
mismatches, and large exposures in format similar to banks
• Financial regulators
– Need to assess data quality
– Identify material gaps in disclosures.
R2: Reprioritized/Expanded FSIs
• Focus on information content:
– Adapt CAR and liquidity measures for banks
– Include leverage and other measures for
systemically important NBFIs
– Enhance the coverage of sectoral balance sheets
(households, corporations) and asset prices
– Develop and incorporate indicators of systemic risk
– Enhance attention to flow-of-funds data
• Will require analytical follow up
– And will need to take into account country, institution,
and market-specific circumstances
R3: Systemic Analysis
• Identify systemically important institutions,
markets, and instruments
– Basic indicators (size, concentration)
– Networks and co-dependencies
• Will require enhanced data
– Inter-institution exposures
– Monitoring of entities outside the regulatory perimeter
• Build tools for analysis:
– Multi-dimensional scoring techniques
– Methodologies for analyzing networks
– Models of tail events/discontinuities
R4: Transparency of Risk Assessments
• Systemically important institutions
– Including both banks and nonbanks
– Should disclose characteristics of
• Risk management practices
• Valuation techniques and risk models;
• Stress test results
• Financial authorities
– The onus will be to assess quality
– And integrate information into financial stability
assessments
R5: Transparency of OTC
Derivative Markets
• Data
– Shift of focus from information on volumes to
information on exposures, counterparties and
market concentration
• Infrastructure
– Disclosure/data would be enhanced by
moving transactions to:
• Centralized clearing house
• Central exchange
The task ahead…
• International coordination critical:
– To ensure consistency in data collection and definition
– To facilitate collection of cross-border exposures
– To avoid regulatory arbitrage.
• The challenges:
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Prioritize among the areas for attention
Identify how best to fill the gaps
Define responsibilities to avoid overlap
Set targeted deliverables