Corporate & Securities Law

By Jim Hamilton

Recent remarks by the two most senior officials of the European Central Bank reflect a growing consensus that the originate and distribute securitization model will be retained in the wake of the subprime crisis. Both ECB President Jean-Claude Trichet and Vice President Lucas Papademos believe that the benefits of securitization argue for its retention so long as major reforms are effected. The ongoing reform of securitization must center on the principles of transparency, liquidity risk management, and cross-border cooperation, in the view of President Trichet.

In remarks at a Paris Europlace seminar, he said that effective international action in this area is imperative given the reality of financial globalization. He praised the recommendations of the Financial Stability Forum; and endorsed the FSF?s proposal to establish a college of regulators for global financial institutions by the end of 2008. The EU experience teaches that a crucial element in a successful college of regulators is the adequate involvement of relevant host country regulators and a coordinating role for the home country regulator Echoing these sentiments at a Frankfurt seminar, Mr. Papademos said that transparency is crucial to the effective functioning of the originate and distribute model.

A key element in fixing securitization is adequate transparency regarding financial institutions and financial instruments. In the president?s view, transparency is the basic ingredient of sound investment decisions and effective risk management. The lack of reliable financial information is a key element in the excessive building up and unwinding of financial imbalances. The ECB vice president added that enhanced transparency is the cure for the complexity of financial products and the imperfect information about the risks of their underlying assets.

It is also essential to for financial institutions to implement prudent liquidity risk management as a first line of defense. The recent crisis revealed that liquidity risk management at a number of financial institutions was not commensurate with the increasing exposure to liquidity risk from both the assets and liabilities side. The central bank head praised the Basel Committee?s recently published principles for sound liquidity risk management as a good start.

Finally, the ECB head urged regulators to institutionalize cross-border cooperation both in normal times and in times of financial distress. In this context, he mentioned as worthy of emulation the recent EU-wide Memorandum of Understanding between regulators, central banks, and financial ministries on cooperation in cross-border financial crises.

Full post as published by Jim Hamilton's World of Securities Regulation on July 03, 2008 (boomark / email).