Senior Supervisors Group Report on Risk Management Lessons from the Global Banking Crisis of 2008
On March 6, 2008, the Senior Supervisors Group (SSG) released its first report,
Observations on Risk Management Practices during the Recent Market Turbulence (the "first report"). The report conveyed our assessment of the risk management practices that made some firms better able than others to withstand market stresses in the fall of 2007.At that time, firms faced the collapse of the leveraged loan market, a near total loss of liquidity in the asset-backed commercial paper market, and a sharp loss in the value of subprime mortgages and of certain structured products such as collateralized debt obligations and securities backed by subprime mortgages. These and other significant difficulties undermined the confidence of investors and counterparties, challenged the resilience of highly interconnected global financial institutions, and destabilized the global financial system, setting the stage for a deep financial crisis.
Following the release of our first report, the decline in housing prices became even more pronounced, triggering a far greater loss of value in mortgage-related exposures and other financial assets and ultimately leading to a weakening of the global economy. Financial losses and public concern grew to the point that investors doubted the accuracy of firms' balance sheets and ultimately their creditworthiness. Around the globe, large financial firms failed, were forced to negotiate their sale to others, or restructured themselves. In other cases, public authorities undertook extraordinary and controversial measures to alleviate the stress, not just on financial organizations, but more broadly on their national economies.
In response to the continuing crisis, the SSG-a forum composed of senior supervisors of major financial services firms from Canada, France, Germany, Japan, Switzerland,
the United Kingdom, and the United States-undertookto evaluate for a second time how weaknesses in firms' risk management and internal controls may have contributed to the industry's severe distress. In this report, we review key developments since the first report, share our risk management observations (primarily on funding and liquidity risk issues) for 2008, and discuss the industry's own sense of its compliance with recommendations put forward in various supervisory and industry studies in 2008.
To capture the industry view, members of the SSG met with senior managers at thirteen of the largest financial institutions in late 2008 to review the funding and liquidity risk challenges they faced that year and the lessons they learned from these challenges.
In late 2008, the SSG members, in our supervisory capacity, asked twenty major global financial firms in our respective jurisdictions to assess their risk management processes to identify any gaps with previously issued industry or supervisory recommendations. The surveyed financial institutions completed these self-assessments during the first quarter of 2009 and presented the results to both their boards of directors and their primary supervisors. The primary supervisors then evaluated the quality of the assessments and held discussions with the firms on their remediation efforts.In light of the continuing stress in the financial markets,SSG members held a second round of interviews with fifteen institutions during the first half of 2009 to explore the broader lessons learned from recent events. Continue reading