Regarding macroeconomic effects in European banking management

Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience

The Financial Stability Forum (FSF)1 undertakes an analysis of the causes and weaknesses that have been emerged by financial turmoil and sets out recommendations for increasing the resilience of the financial system in its report dated April 7, 20082. The Forum highlighted the necessity of fair valuation practices as a prerequisite for liquidity conditions and the sound operation of credit mechanisms related to asset markets as well as the necessity of collaboration between financial institutions and independent auditing firms to improve the existing methods for disclosure and valuation of risks in the short-term. The Forum underlined the importance of close monitoring being maintained by supervisory authorities regarding whether the financial institutions' capital and liquidities are at an adequate level in the face of sudden risks and whether they could be increased when needed, and also indicated that central banks should continue to intervene in a coordinated, rapid and flexible manner when required. In the medium-term, the Forum gave priority to the widespread implementation of Basel II risk framework and oversight; implementation of transparency, intra-day risk controls and stress tests as well as design of contingency funding plans in order to strengthen risk management standards for liquidity adequacy. In this framework, the report emphasizes the importance that large banks share their liquidity contingency plans with relevant central banks; supervisory authorities focus on the risk management capacity of financial institutions; and Basel II requirements are implemented with regard to off-balance sheet activities to ensure adequate management of risks within the financial system and to prevent arbitrage through off-balance sheet activities in high amounts. "Originate-to-distribute models"3 can be simply defined as transfer of risk, that is exposed by banks due their main intermediation function in the system (which is investing funds collected -mainly deposits- into credit business), out of balance sheet through methods like securitization. In this regard, the Forum made recommendations on enhancing the standards for the origination, underwriting and insurance of the contract during the securitization process. At each stage of the securitization process, the role and use of credit ratings should be strengthened download