The Financial
Crisis and
Information Needs
for Financial
Surveillance
Christopher Towe
Deputy Director
Monetary and Capital Markets
Department
International Monetary Fund
Lessons from the Crisis
• Information gaps were extreme:
– Limited data on risk exposures
• Partly due to expansion of intermediation through
unregulated channels and new instruments
– Gaps in information content
• Indicators gave misleading signals, blunting early warning
– Unanticipated financial system and cross-border
networks and interdependencies
• amplified the reach and severity of the crisis for financial
systems, the real economy, and internationally.
• As a result, even the doomsayers had difficulty
in making their cases convincingly
Key gaps—Financial Innovation
• Rapid innovation and growth in new areas:
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Complex structured products
Off-balance sheet entities
Trading books of banks’ balance sheets
Over-the-counter derivative markets
Non-bank financial intermediaries
• Investment banks, insurance companies, hedge funds,
mortgage broking
• These markets and instruments had limited
history, disclosure requirements, and data
• And were lightly regulated
Key Gaps—Major Banks
• Gaps related to rapid growth of commercial and
investment bank lending:
– Use of complex structured products and off balance
sheet entities
• Contributed to overestimation of risk transfer
– Lack of consistency and transparency in
disclosures, especially in their granularity
• Undermined risk assessments, at an institution level and
systemically
– Insufficient data on cross-border exposures and
capital flows
• Hampered analysis of cross-country spillovers
Key Gaps—Asset Valuation Techniques
and Risk Modeling
• Flawed calibration
– Based on benign segment of the credit cycle
– Inadequate basis for assessing discontinuities during
crises;
• Fractional coverage
– Models often applied to only a portion of portfolios
– Limited consideration of interaction between market,
liquidity, credit and reputation risks;
• Heterogeneous risk modeling across institutions
– Complicated supervisory oversight
Key Gaps—OTC Instruments
• Gaps in information related to lack
centralized clearing and exchange
– OTC transactions not tracked
– Unclear counterparty risks
– Lack of netting
• But risk layering also led to opacity
– With regard to underlying risk of the
instrument
– And who bore the risk
Key Gaps—Non-Banks
• The crisis exposed a lack of information
on:
– Money market funds, insurance companies,
mortgage brokers, pension funds, and hedge
funds
– Including with regard to exposures, leverage,
and maturity mismatches
– Their inter-connectedness has also been
shown to be source of vulnerability
Key Gaps—Information Content
• Some financial soundness indicators (FSIs) performed
poorly as early warning indicators
– E.g., CAR and liquidity indicates continued to indicate
soundness even as financial conditions deteriorated;
– Others, such as sectoral leverage, provided better early warning,
but data collection was incomplete.
• Market indicators also failed
– Driven by contemporaneous information
– Risk and volatility measures were at historic lows prior to crisis.
• Macro-prudential modeling proved inadequate, and did
not address:
– systemic risks,
– spillover effects, and
– network effects
Initiatives Are Underway
• Enhanced disclosure for banks under Basel II Pillar 3
(BCBS);
• Improved disclosure of structured products (project
START);
• Revised reporting requirements for off balance sheet
entities (IASB);
• Centralized clearing for CDS (FRBNY) and disclosure of
transactions data (DTCC);
• Enhanced disclosure by rating agencies (IOSCO);
• Improved disclosure by hedge funds to investors/clients
and counterparties (HFWG)
• Economic Statistics Initiatives
• Debt securities (Working Group on Security Databases)
• Improved cooperation (Inter Agency Group on Economic and
Financial Statistics)
But there is more to be done…
R1: Strengthen disclosure standards of banks and
systemically important NBFIs;
R2: Reprioritize Financial Soundness Indicators;
R3: Develop data and tool set for analysis of
system wide risks;
R4: Strengthen disclosure and information
exchange on assessments of complex
models;
R5: Improve transparency in OTC derivative
markets.
R1: Systemically Important Institutions
• Large banks
– Disclose market positions, exposures to economic sectors, large
counterparties and countries, off-balance sheet activity, and the
banking and trading books;
– Using common templates across countries to permit
aggregation, institutional comparison, and identification of
network links;
• Systemically important NBFIs
– Lesser requirements but should disclose leverage, maturity
mismatches, and large exposures in format similar to banks
• Financial regulators
– Need to assess data quality
– Identify material gaps in disclosures.
R2: Reprioritized/Expanded FSIs
• Focus on information content:
– Adapt CAR and liquidity measures for banks
– Include leverage and other measures for
systemically important NBFIs
– Enhance the coverage of sectoral balance sheets
(households, corporations) and asset prices
– Develop and incorporate indicators of systemic risk
– Enhance attention to flow-of-funds data
• Will require analytical follow up
– And will need to take into account country, institution,
and market-specific circumstances
R3: Systemic Analysis
• Identify systemically important institutions,
markets, and instruments
– Basic indicators (size, concentration)
– Networks and co-dependencies
• Will require enhanced data
– Inter-institution exposures
– Monitoring of entities outside the regulatory perimeter
• Build tools for analysis:
– Multi-dimensional scoring techniques
– Methodologies for analyzing networks
– Models of tail events/discontinuities
R4: Transparency of Risk Assessments
• Systemically important institutions
– Including both banks and nonbanks
– Should disclose characteristics of
• Risk management practices
• Valuation techniques and risk models;
• Stress test results
• Financial authorities
– The onus will be to assess quality
– And integrate information into financial stability
assessments
R5: Transparency of OTC
Derivative Markets
• Data
– Shift of focus from information on volumes to
information on exposures, counterparties and
market concentration
• Infrastructure
– Disclosure/data would be enhanced by
moving transactions to:
• Centralized clearing house
• Central exchange
The task ahead…
• International coordination critical:
– To ensure consistency in data collection and definition
– To facilitate collection of cross-border exposures
– To avoid regulatory arbitrage.
• The challenges:
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Prioritize among the areas for attention
Identify how best to fill the gaps
Define responsibilities to avoid overlap
Set targeted deliverables