Beef up risk management to protect economic recovery, says European Central Bank
Financial institutions need to beef up their risk management if a repeat of the past year's events is to be avoided, according to the European Central Bank (ECB).
At a briefing at the Bank for International Settlements (BIS) in Basel, Switzerland,the ECB President Jean-Claude Trichet warned: “We have to get risk management very significantly improved by market participants and financial institutions. That’s something of the essence.”
Trichet said there are clear signs of improvement with emerging economies “very, very clearly in a more dynamic mode now”. He added: “At the global level there is a confirmation of the progressive normalization of the economy and of the fact that at a global level we are on a recovery mode.”
Meanwhile the Basel Committee's supervisory body warned that it is vital that central bankers and regulators finalize reforms to global banking standards as soon as possible to ensure the long-term sustainability of economic growth.
The Group of Central Bank Governors and Heads of Supervision welcomed "substantial" progress by the BIS Basel Committee on Banking Supervision. But more progress needs to be made in provisioning, the introduction of counter-cyclical capital buffers, addressing the risk of systemic banking institutions, assessing the role that could be played by contingent capital and minimum global liquidity standards. "The Basel Committee should translate these principles into a practical proposal by its March 2010 meeting for subsequent consideration by both supervisors and accounting standards setters," it said.
"So-called 'through-the-cycle' approaches...which promote the build-up of provisions when credit exposures are taken on in good times that can be used in a downturn would be recognised," the committee said. In December, the Basel Committee published a draft set of global standards designed to ensure banks have enough high-quality capital and a pool of liquid assets that will allow them to weather future financial crises. "Timely completion of the Basel Committee reform program is critical to achieving a more resilient banking system that can support sound economic growth over the long term," said Trichet.