My interest was attracted by an article in the National Post, Banking group slams asset-backed securities market; the print headline is “Banks ‘Asleep at Switch'”; neither headline appears to be reporting on the purported substance of the story, a letter from the IIF, addressed to the chairman of the International Monetary and Finance Committee, that has been released on their website.
OK – first question: Who is the IIF? It is the Institute of International Finance, Inc., which claims to be “the world’s only global association of financial institutions”. I can’t remember having heard of them before. According to their annual report, they have annual revenue of about $25-million; certainly enough to hire a few analysts and buy sandwiches for their meetings, but hardly heavyweight. By way of comparison, the CFA Institute, to which I belong and which is notable mainly for its lack of relevance to my life, has annual revenue of a little over $100-million.
Now to look at their recommendations (bolded) with my commentary (plain):
- Going forward, market participants, including those currently not regulated, need to take the lead to enhance due diligence and strengthen credit discipline. Senior management of financial firms has a critical role to play in this context. As supervisors and central banks are also reviewing some of their approaches, we encourage them to do so in a focused manner so as to avoid possible overreaction. Meaningless.
- ratings agencies should, in cooperation with market participants, review their approaches, including possible changes in ratings to clarify what is being assessed. Even after taking this into account, investors will be well advised to keep in mind that external ratings are just one component of a sound internal risk management system, not a substitute for it. Meaningless.
- A top priority of market participants should be to develop conventions to value these complex financial instruments [structured credit], to ensure that the benefits of financial innovation for the efficiency of markets are fully realized.. This is more than just a little bit wierd. After implying that part of the problem was over-reliance on external credit ratings, they want to encourage reliance on external pricing? Let’s just have a little bit more cheerful anarchy in the markets and a little bit less reliance on Bloomberg’s analysis, shall we?
- central banks should provide greater clarity about the modalities of the exercise of their role as lenders of last resort in times of crisis; expand the range of acceptable collateral and clarify policies as to haircuts; and increase the availability of cross-border collateralization. Recent events also suggest that central banks might consider the scope for better coordination of the timing and the maturities of their liquidity injections, while taking account of differences in market circumstances. I don’t know about this one. It strikes me that a little bit of uncertainty is good for the markets … let’s keep moral hazard to a minimum. Expanding the range of acceptable collateral – on a permanent basis, not just the temporary relaxation of recent times – is something that is often discussed; has been for years; probably since the start of central banking! I am comfortable with the current system that the central banks will accept only the highest quality, most liquid securities as collateral, with discretion to relax these rules whenever they feel like it. Central banks cannot and should not have the slightest concern about few speculators, overloaded with wierd stuff, going bankrupt; the concern should be restricted to the functioning of the overall market as chiefly expressed in the operations of a core group of strongly capitalized banks.
- To minimize such problems in the future, disclosure practices [regarding banks exposures to structured credit and their credit line committments to customers] need to be improved so as to allow investors and other market participants to properly assess and price risk, thus effectively exercising market discipline. I don’t know about this one. It’s difficult to argue against such a motherhood issue as disclosure, but too much is enough, already! Presumably, the central banks have authority to require disclosure when disbursing emergency funds; I think it would be quite sufficient to ensure that banks have the ability to provide such disclosure if, as and when they feel like it, without actually making such disclosure mandatory.
- [The IMFC should] explicitly encourage prompt but deliberative efforts involving official and private financial institutions to evaluate pragmatic approaches that will continue to support financial innovation, while reducing the risk of a recurrence of the current problems. Well, what’s to say? This may be code, encouraging the current IMFC to boldly go where no IMFC has gone before, but it may just be motherhood. In any event, this recommendation seems rather devoid of substance.
- In view of current conditions and expectations, the IMFC, in its discussions of the global outlook, should stress the importance of central banks striking a delicate balance now Sounds good to me!
- to reinforce the commitment to the coordination process in the achievement of agreed goals. Recent events have clearly demonstrated how market-driven adjustments in the face of excesses and imbalances can impose large and unexpected systemic costs. This should be a matter of concern to both leading industrialized and emerging market countries. They should have more meetings? Possibly sponsored by the IIF?
- We believe that the IMF and the World Bank could play valuable roles in this area [of developing regulations for Sovereign Wealth Funds]. This looks like more political code. No comment until I’ve heard more.
- Therefore, the IMF should reaffirm the importance of policy vigilance on the part of emerging market authorities as well as work closely with them to help implement needed structural reforms and further develop local capital markets. The identification and possible mitigation of risks associated with external borrowing in local banking and corporate sectors is an area that deserves attention. Greater transparency and strong investor relations programs, as emphasized by the Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, should also be encouraged. This appears to be a simple reiteration of motherhood statements.
All in all, rather a disappointing letter. My guess is that they felt they had to say something, but they had to say it without offending any of their members. I’m rather surprised that the National Post gave such prominence to it.
Update: Related to this story is news that the US Treasury is:
talking with Citigroup Inc., JPMorgan Chase & Co. and other banks about a plan to jump-start the asset-backed commercial paper market.
Policy makers are concerned that investors remain reluctant to purchase the paper even if the loans that back them are sound, said a U.S. government official, who declined to be identified.
The discussions over the past two weeks have focused on structured investment vehicles, the units set up by banks and hedge funds to finance purchases of assets including subprime mortgage securities, said the official and a banker with knowledge of the deliberations. One plan under consideration would involve setting up a consortium backed by several of the biggest financial companies, the banker said.