Lack of Experience Seen in Some Firms in Credit Crisis

A report prepared by senior financial supervisors from five countries that seeks to assess risk management practices during the recent “market stress” has found that those firms least affected “demonstrated a comprehensive approach to viewing firm-wide exposures and risk, sharing quantitative and qualitative information more effectively…and engaging in more effective dialogue with the management team.”

This report, “Observations on Risk Management Practices during the Recent Market Turbulence,” will be used to support international forums including the Basel Committee on Banking Supervision and International Organization of Securities Commission.

Its findings suggest that improving disclosure practices may reduce uncertainty about the scale of potential loses in the future and questions “the challenges in managing incentive problems created by [performance-based] compensation practices."

Executives at firms that recorded larger losses, according to the report, also did not have the same degree of experience in capital markets and “did not advocate quick, strong, and disciplined responses.”

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.

This work was also undertaken in response to a request from the Financial Stability Forum which has established a Working Group on Market and Institutional Resilience that is preparing a separate report to the Finance Ministers and Central Bank Governors of the G-7 countries on the underlying causes of recent financial market turmoil.