Risk Mgt Failures Major Cause Of Crisis: IMF

Source : The Business Times, April 11, 2008

WASHINGTON - Risk management at large Western banks was deficient and 'a major cause' of the current financial crisis, the International Monetary Fund (IMF) said on Thursday.







The shortcomings showed a lack of 'judgement and governance' by the banks, the IMF said in a document prepared for finance ministers and central bank chiefs before weekend IMF and World Bank meetings in Washington.

Problems were complicated by weaknesses in accounting and regulatory standards, the fund said.

'Both managers and supervisors need to play a more active role in scrutinising these practices, especially with regard to liquidity management, off-balance-sheet entities and structured products, and to pursue more active stress testing,' the IMF said.

The IMF said that credit-rating agencies also failed to capture risks posed by structured investment vehicles.

It said investors relied too heavily on the ratings.

Looking ahead, it said that there may be merit in a broader approach to revamp the role and use of credit rating agencies.

'This suggests the need to improve methodologies and to adopt a differential rating system for structured instruments, taking better account of their different risk profile, and to review how prudential norms would then need to be modified,' it said.

The IMF said that weaknesses in applying accounting standards and gaps related to the valuation and financial reporting of structured investment vehicles added to the crisis.

It suggested further guidance was needed on how to apply so-called fair-value accounting, particularly when markets face a credit squeeze.

The challenge will be for national authorities and international institutions to coordinate better on cross-border accounting and regulatory standards and disclosure practices, the IMF said.

The fund said that the crisis revealed a need to adapt tools and practices to manage liquidity and cross-country differences in emergency liquidity frameworks.

'Central banks may need to broaden the range of collateral and counterparties that they can deal with and, given the level of cross-border finance, work to avoid significant differences in practice,' it said.

More supervision and better crisis management was needed, especially when it came to new financial instruments, the IMF said. -- REUTERS