A report prepared by seniorfinancial supervisors from five countries that seeks to assess risk managementpractices during the recent “market stress” has found that those firms leastaffected “demonstrated a comprehensive approach to viewing firm-wide exposuresand risk, sharing quantitative and qualitative information more effectively…andengaging in more effective dialogue with the management team.”
This report, “Observations on RiskManagement Practices during the Recent Market Turbulence,” will be used tosupport international forums including the Basel Committee on BankingSupervision and InternationalOrganization of Securities Commission.
Its findings suggest thatimproving disclosure practices may reduce uncertainty about the scale ofpotential loses in the future and questions “the challenges in managingincentive problems created by [performance-based] compensation practices.”
Executives at firms that recordedlarger losses, according to the report, also did not have the same degree ofexperience in capital markets and “did not advocate quick, strong, anddisciplined responses.”
The seven supervisory agenciesparticipating in this project are the French Banking Commission, the GermanFederal Financial Supervisory Authority, the Swiss Federal Banking Commission,the U.K. Financial Services Authority, and, in the United States, the Office ofthe Comptroller of the Currency, the Securities and Exchange Commission, andthe Federal Reserve.
This work was also undertaken inresponse to a request from the Financial Stability Forum which has establisheda Working Group on Market and Institutional Resilience that is preparing aseparate report to the Finance Ministers and Central Bank Governors of the G-7countries on the underlying causes of recent financial market turmoil.