IMF / FINANCIAL STABILITY PRESSER

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29-Sep-2010 00:03:24
A new IMF analysis says that credit ratings have inadvertently contributed to financial instability in financial markets during the recent global crisis and more recently with regard to sovereign debt. IMF

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STORY: IMF / FINANCIAL STABILITY PRESSER
TRT: 3:24
SOURCE: IMF
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LANGUAGE: ENGLISH / NATS

DATELINE: 29 SEPTEMBER 2010, WASHINGTON, DC / FILE

SHOTLIST:

RECENT – WASHINGTON DC

1. Wide shot, IMF exterior

29 SEPTEMBER 2010, WASHINGTON DC

2. Med shot, speakers walks in and get settled at the table
3. SOUNDBITE (English) Laura Kodres, Monetary and Capital Markets Department, IMF:
“Just as your doctor tells you when your annual physical that consuming food and alcohol in moderation is fine for healthy lifestyle. Similarly, we would say moderate use of short term whole sale funding, and moderate use of credit rating agencies in the context of investment decision making are also acceptable for healthy financial system. So I think we want to make sure that we understand that it’s not that we think credit agencies are bad thing. No, they are actually a good thing used in moderation. Similarly, short-term whole sale funding can help banks with short-term issues having to do with funding processes in again healthy situation. It’s the over reliance on the two elements that cause difficulties in crisis. That’s we want to emphasize that’s been corrected in nature.”
4. Cutaway, journalists
5. SOUNDBITE (English) Jeanne Gobat, Monetary and Capital Markets Department, IMF:
“The excessive reliance by financial institutions of short-term sources of whole sale funding contributed to the wide spread of liquidity risk in the financial systems. We show that the host effect of the trend shift and funding structures. These include deregulation and global financial integration making it easier for financial institutions to access market including cross borders cross currencies and cross sectors. Moreover, regulations under the two frameworks favored repurchase transactions so-called repos, a formal security lending over unsecure funding.”
6. Cutaway, journalists
7. SOUNDBITE (English) Jeanne Gobat, Monetary and Capital Markets Department, IMF:
“As to solutions for institutions, the report welcomes the recent credential liquidity rules proposed by the Basel Committee on banking supervision. These are steps in the right direction. They raised liquidity buffers and encourage banks to reduce the mismatch between cash flows from their assets and payment obligations on their liabilities, and lower the chances of the systemic liquidity event in the future. It will be the first time that such quantitative rules applied in the global level.”
8. Cutaway, journalists
9. SOUNDBITE (English) John Kiff, Monetary and Capital Markets Department, IMF:
“We also show that some aspects of rating agencies downgrade smoothened policies, and inadvertently create pro-cyclical rating cliff effect. The problem is not the way that most agencies rate through the cycle. This rating through the cycle actually smoothen policies that introduces useful rating stability. The problem with the policies is that bottle up potential down grade that the rating criteria and the new information would point to. So down grade do finally occur. Cliff effect can be extreme.”
10. Cutaway, journalists
11. SOUNDBITE (English) John Kiff, Monetary and Capital Markets Department, IMF:
“Stress the importance to continue to push rating agencies to improve their procedures including transparency, governance and mitigation of conflict of interest. In particular, we call for rating agencies, ratings are used to calculate banks regulatory capital requirements to meet more rigorous validation standards, basically the same ones that banks use to satisfy when use their own internal models.”
12. Wide shot, IMF exterior

STORYLINE:

A new IMF analysis says that credit ratings have inadvertently contributed to financial instability in financial markets during the recent global crisis and more recently with regard to sovereign debt. The analysis recommends that regulators reduce their reliance on credit ratings as much as possible and increase their oversight of the agencies that assign the ratings the ratings used in regulations.

SOUNDBITE (English) Laura Kodres, Monetary and Capital Markets Department, IMF:
“Just as your doctor tells you when your annual physical that consuming food and alcohol in moderation is fine for healthy lifestyle. Similarly, we would say moderate use of short term whole sale funding, and moderate use of credit rating agencies in the context of investment decision making are also acceptable for healthy financial system. So I think we want to make sure that we understand that it’s not that we think credit agencies are bad thing. No, they are actually a good thing used in moderation. Similarly, short-term whole sale funding can help banks with short-term issues having to do with funding processes in again healthy situation. It’s the over reliance on the two elements that cause difficulties in crisis. That’s we want to emphasize that’s been corrected in nature.”

In a second IMF study released Wednesday, the IMF has found that the inability of financial institutions, including banks, to obtain short-term funding during the global financial crisis was the result of weaknesses in risk management practices by the institutions themselves, serious and unforeseen issues in how wholesale funding markets work, and regulatory gaps.
SOUNDBITE (English) Jeanne Gobat, Monetary and Capital Markets Department, IMF
“The excessive reliance by financial institutions of short-term sources of whole sale funding contributed to the wide spread of liquidity risk in the financial systems. We show that the host effect of the trend shift and funding structures. These include deregulation and global financial integration making it easier for financial institutions to access market including cross borders cross currencies and cross sectors. Moreover, regulations under the two frameworks favored repurchase transactions so-called repos, a formal security lending over unsecured funding.”

Financial institutions increasingly relied on short-term wholesale rather than deposit-based funding to finance their activities, which caused system-wide liquidity shortages when wholesale markets dried up. The systemic liquidity shortage essentially the simultaneous and widespread inability of institutions to find the cash they need to operate was one of the key factors that threatened the health of the global financial system and triggered massive interventions by authorities to keep banks and other financial institutions afloat.

SOUNDBITE (English) Jeanne Gobat, Monetary and Capital Markets Department, IMF:
“As to solutions for institutions, the report welcomes the recent credential liquidity rules proposed by the Basel Committee on banking supervision. These are steps in the right direction. They raised liquidity buffers and encourage banks to reduce the mismatch between cash flows from their assets and payment obligations on their liabilities, and lower the chances of the systemic liquidity event in the future. It will be the first time that such quantitative rules applied in the global level.”

In the case of sovereign debt, the IMF said in the report released September 29, the problem does not lie entirely with the ratings themselves, but with over-reliance on ratings by market participants, coupled with deleterious sell-offs of securities when they abruptly downgraded called “cliff effects.” The IMF says, however, that credit rating agencies (CRAs) have to shoulder some of the blame for these cliff effects, because they may pay insufficient attention to sovereign debt composition and contingent liabilities.

SOUNDBITE (English) John Kiff, Monetary and Capital Markets Department, IMF:
“We also show that some aspects of rating agencies downgrade smoothened policies, and inadvertently create pro-cyclical rating cliff effect. The problem is not the way that most agencies rate through the cycle. This rating through the cycle actually smoothen policies that introduces useful rating stability. The problem with the policies is that bottle up potential down grade that the rating criteria and the new information would point to. So down grade do finally occur. Cliff effect can be extreme.”

The IMF’s John Kiff said that improving transparency should help mitigate these risks.
SOUNDBITE (English) John Kiff, Monetary and Capital Markets Department, IMF:
“We stress the importance to continue to push rating agencies to improve their procedures including transparency, governance and mitigation of conflict of interest. In particular, we call for rating agencies, ratings are used to calculate banks regulatory capital requirements to meet more rigorous validation standards, basically the same ones that banks use to satisfy when use their own internal models.”

The IMF report, which is part of the main Global Financial Stability Report to be released October 5, also emphasized that despite these issues, ratings serve a useful purpose. They aggregate information about the credit quality of various types of borrowers and their financial obligations, allowing such borrowers access to global and domestic markets, and enabling them to attract investment funds. The ratings add liquidity to markets that would otherwise be highly illiquid.
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IMF
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U100929i