18 June 2008

OECD Financial Market Trends – June 2008

The publication contains articles focusing in particular on the recent financial turmoil such as lessons regarding deposit insurance, and on sovereign wealth and pension fund issues.

The publication contains articles focusing in particular on the recent financial turmoil. It also contains articles on sovereign wealth and pension fund issues.

 

Its articles cover the size, deleveraging and policy issues of the subprime crisis; lessons regarding deposit insurance; issues related to financial guarantee insurance; sovereign wealth and pension fund issues; pension funding regulations and risk-sharing; and the use of derivatives in public debt management.

 

Financial Turbulence: Some Lessons Regarding Deposit Insurance

The article singles out four areas for special attention.

First, as regards coverage, deposit insurance systems with low levels of coverage and/or partial insurance may not be effective in preventing bank runs.

Second, for an explicit deposit insurance system to be effective, depositors need to understand the extent of and limits to existing deposit protection schemes.

Third, when different institutions are entrusted with responsibilities that are relevant in a crisis situation, ex ante arrangements delimiting the scope of the different responsibilities as well as the respective powers may not be sufficient to ensure co-ordination that is as close and smooth as needed.

Fourth, the question as to whether a specific bankruptcy regime for banks is needed remains an important issue.

 

Challenges Related to Financial Guarantee Insurance

The note identifies three policy issues that arise in the context of the current challenges and it draws some preliminary findings.

First, while concerns regarding the potential financial stability implications of further downgrades and/or failures of some of these companies have ebbed somewhat from their peaks in early 2008, the situation still bears monitoring.

Second, current developments raise questions regarding the role of financial guarantors in specific financial market segments. In this context, there appears to be a public interest in the continued availability of guarantees on payments on municipal bonds. Private solutions seem to be forthcoming.

Third, transparency of the financial guarantee insurance sector is limited. In this context, the performance of credit rating agencies in providing guidance for investors regarding the quality of the guarantees provided by financial guarantors appears to have been uneven.

 

Sovereign Wealth and Pension Fund Issues

There is concern about strategic and political objectives of SWFs, and their impact on exchange rates and asset prices. But SWFs also provide mechanisms for breaking up concentrations of portfolios that increase risk. Enhancing governance and transparency of SWFs is important, but such considerations have to be weighed against commercial objectives.

 

Governance and Investment of Public Pension Reserve Funds in Selected OECD Countries

Some specific details of the funds’ governance and investment management could be improved in a few countries, such as enhancing the expertise in the funds’ governing boards and constraining discretionary interventions by government. Such reforms will ultimately raise the long-term investment performance of the funds and the solvency of social security systems.

 

Funding Regulations and Risk Sharing

While the document does not enter the debate over the application of risk-based quantitative funding requirements to pension funds (as under Basel II or Solvency II), it identifies the risk factors that should be evaluated and considered in a comprehensive risk-based regulatory approach, whether prescriptive or principles-based. The three main risk factors identified are the nature of risks and the guarantees offered under different plans designs, the extent to which benefits are conditional and can be adjusted, and the extent to which contributions may be raised to cover any funding gap. In addition, the strength of the guarantee or covenant from the sponsoring employer(s) and of insolvency guarantee arrangements should be carefully assessed when designing funding requirements.

 

Evaluating the Impact of Risk-Based Funding Requirements on Pension Funds

The objective of this study is to analyse what the quantitative funding requirements for pension funds with defined benefit plans would be, if Solvency II (based on the QIS 3 methodology) would be applied. Also possible extensions of the Solvency II methodology that seem necessary in order to reflect the specifics of pension funds will be discussed.

 

Financial Markets Highlights – May 2008: 

Overview

The Recent Financial Market Turmoil,  Contagion Risks and Policy Responses

The Subprime Crisis: Size, Deleveraging and Some Policy Options

Sovereign Wealth and Pension Fund Issues

Governance and Investment of Public Pension Reserve Funds in Selected OECD Countries

 

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