Trichet Urges Better Risk Control

Article excerpt


The subprime mortgage crisis in the US has forced the president of the European Central Bank (ECB) to speak out about the new sources of risk being created by the market's appetite for increasingly complex financial instruments. At the European parliament's Economic and Monetary Affairs committee hearing, Jean-Claude Trichet stated that innovation and creativity in global financial markets may have improved financial efficiency, but it had also created new forms of risk.

The problem, says Trichet, is that banks' and investors' appetite for new investment structures is not matched by sophisticated management of the risks generated by these new instruments. "The degree of complexity of some products that are designed for the purposes of re-packaging and selling debt instruments has become overwhelming," he stated. He balked at stifling the industry's "creative" urges but said the industry needed to broaden its understanding of risk. "Investments and structures that cannot be fully understood even by those who bear the ultimate responsibility of the level of risk taken by financial institutions should not be acquired or set up by banks and investors who are lacking sufficient sophistication in the management of the risks," he said. …