Joint Forum issues report on credit risk transfer

The Joint Forum today released for consultation a report prepared by its working group on risk assessment and capital entitled Credit Risk Transfer. The report responds to a request by the Financial Stability Forum (FSF) to undertake a review of credit risk transfer (CRT) activity. The objective was to contribute to an increased understanding of CRT activities and the issues that these activities raise for regulated financial institutions and their supervisors. The report looks at the financial stability implications of CRT activities as well as the trends, market developments, extent and sources of risk transfer – in particular with credit derivatives transactions.

The Joint Forum has consequently developed a set of recommendations for market participants and supervisors. These address risk management practices, disclosure and supervisory approaches in respect of CRT activities.

The Chairman of the Joint Forum, Gay Huey Evans, said today, “CRT activity has been growing at a rapid pace over recent years and has the potential to contribute to more liquid and efficient markets for the transfer of credit risk. Although the Joint Forum’s report does not point to immediate and significant concerns from a financial stability standpoint, I believe it is important for market participants to continue to improve risk management practices and for supervisors to continue improving their understanding of the associated issues in this area. Adoption of the recommendations included in the report will go a long way to ensuring this objective is met.”

She continued, “I am delighted to be able to release this informative report and would encourage firms to provide comments during the consultation period.”

The Joint Forum has undertaken efforts to coordinate with similar projects initiated in the European Union; in particular, European Bank’s Bank Supervision Committee (BSC), Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) and the Committee of European Securities Regulators (CESR).

The Joint Forum was established in 1996 under the aegis of the BCBS, IOSCO and the IAIS to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.

Gay Huey Evans is Director of Markets in the UK Financial Services Authority.

The report is available on the websites of the Bank for International Settlements ( www.bis.org), IOSCO ( http://www.iosco.org) and the IAIS ( http://www.iaisweb.org). Comments are invited and should be forwarded by e-mail to baselcommittee@bis.org by 28 January 2005.