Global banking group calls for improved risk management

Jul 17, 2008, 22:08 GMT

Washington - A worldwide banking coalition on Thursday proposed reforms in how the international industry does business, in response to the global credit crisis that arose from the 2007 meltdown in the US mortgage market.

The Institute of International Finance (IIF), an association of 380 top banks and financial services companies, issued a report in Washington after nine-month study of 'best practices' for the industry by an IIF committee focused on the ongoing turmoil in lending and financial markets.

The proposals were lead by a call for better risk management.

'The central issue for improved performance by financial services firms is risk management,' said IIF Chairman Josef Ackermann, who is chairman of Deutsche Bank AG.

The report found that responsibility for risk management should explicitly extend to bank chief executives, and that firms should evaluate their own risk exposure by multiple methods, not just one technique.

Executive pay incentives were 'one of the weaknesses' in recent business practices, and financial service firms must ensure that incentives for decision-makers do not encourage undue risk-taking.

The report called for an external, independent review of rating agency to re-establish market confidence in the system of bond ratings, which has been hit hard by the collapse many formerly popular bonds that packaged large numbers of high-risk mortgages.

Ackermann announced that the IIF would establish a Market Monitoring Group to spot previously unrecognized vulnerabilities in the global financial system.

'The timely assessment of market developments with systemic implications ... can contribute to better risk management by financial services firms,' he said.

IIF managing director Charles Dallara said that the new panel would focus 'on perceived mispricing of risk, crowded trades and concentration risk and take into account potential contagion among markets.'