CGFS issues reports pertinent to the financial turmoil
The Committee on the Global Financial System (CGFS) today published three reports analysing important issues pertinent to the financial market turmoil that broke out in mid-2007. They are:
- Private equity and leveraged finance markets;
- Ratings in structured finance: what went wrong and what can be done to address shortcomings?; and
- Central bank operations in response to the financial market turmoil.
CGFS Chairman Donald L Kohn said that these reports highlight the role that the Committee has played during the market turbulence in informing central banks' assessments of risks to financial stability and in elaborating appropriate policy recommendations. Earlier versions of the reports on central bank operations and credit ratings in structured finance served as input for the April 2008 Financial Stability Forum report to the G7 Finance Ministers and central bank Governors.
Private equity and leveraged finance markets was prepared by a working group chaired by Henk Brouwer of the Netherlands Bank. It was written amidst rapidly deteriorating conditions in leveraged finance markets. Against this backdrop, the report addresses two broad questions. First, what have been the important trends during the period of rapid growth in the markets for leveraged finance, private equity and LBOs, and how has market growth affected corporate finance? Second, how have leveraged finance markets performed since mid-2007, which risks have surfaced, and what preliminary lessons can be drawn for financial stability?
The report highlights a number of risks, including short-term risks associated with the unwanted expansion of arranger banks' balance sheets due to undistributed leveraged loans, medium-term risk resulting from the refinancing needs of highly leveraged corporations and long-term risks for the availability of leveraged finance.
Ratings in structured finance: what went wrong and what can be done to address shortcomings? was prepared by a CGFS study group led by Nigel Jenkinson of the Bank of England. It revisits a topic the Committee discussed in its 2005 working group report The role of ratings in structured finance: issues and implications. Key risks highlighted in that report materialised during the credit market turbulence.
The current report draws on the lessons learnt during the turmoil about the vulnerabilities of ratings of structured finance products. While emphasising that credit rating information should support, not replace, investor due diligence, the report provides a number of specific recommendations on how the information provided on ratings of structured finance products can be improved.
The report also includes a summary of the feedback received during a consultation process with credit rating agencies and investors. A number of initiatives to enhance the information provided on structured finance ratings are already under way. In the light of these initiatives, the CGFS will follow up with credit rating agencies and investors on the recommendations made in the report.
The report Central bank operations in response to the financial market turmoil examines how central banks have adapted their liquidity operations in response to the money market tensions that emerged during the turbulence. The report was prepared by a study group convened by the CGFS in cooperation with the Markets Committee. Under the chairmanship of the ECB's Francesco Papadia, the study group brought together senior central bank market operations experts from seven major currency areas.
The report discusses the various measures taken by central banks, assesses the outcome of these measures and sets out seven recommendations for central bank liquidity operations. The report was drafted during a time when central banks were closely monitoring market developments and, more or less simultaneously, needed to respond to the evolving challenges. Indeed, some of the specific recommendations discussed by the study group had already been implemented during the drafting period.
This report reflects the study group's experience and assessment up to end-April 2008, at which time market tensions persisted. Central banks continue to draw lessons from the turmoil and to examine how their liquidity operations can be made more effective. In particular, central banks are exploring the steps they might take to facilitate mobilising liquidity across national borders.