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“Financial institutions should gather a wide range of relevant information before they see market troubles brewing”, Governor Kroszner of the US Treasury said. “Scrambling for information once turbulence sets in is not good practice”.
Kroszner criticized that with regard to the risk-management techniques in some areas challenges remain. “Market participants must ensure that they do not make valuation decisions based solely on excessive reliance on external ratings or evaluations, but that they also undertake their own assessment”, he noted. “Unfortunately, in some recent cases new products were developed very quickly and not properly road tested.”
“Market liquidity played a large role in recent events”, he said. “Problems arose when some managers did not make market-liquidity adjustments in their quantitative estimates and models and simply relied on recent information from good times, when there was ample liquidity.”
Kroszner called on institutions to make appropriate adjustments to risk management. “Firms should focus on long-term improvements in their risk-management culture”, the governor stated and underlined the role of information flows and incentives, firms should devote particular attention to.