Intellectual Thoughts by Sanjay Panda !!!!!: Financial far sight


Friday, May 1, 2009

Financial far sight

The ongoing financial crisis in the mature markets abroad has led to much introspection in the domain of policy-making and academia. Products must be made more transparent, with risk mitigation and prudential measures much better aligned. The quality and effectiveness of financial supervision must improve. It follows that the gaps and weaknesses in the prudential norms do need to be properly addressed, with proactive oversight and follow through. The crisis has much to do with the heavy issuance of credit-linked, mostly mortgage-backed, securities in the US, and subsequent large-scale default on the underlying assets, mainly housing.

The fact is that the push for increased sub-prime mortgages earlier this decade followed by securitisation of the receivables greatly compounded the problem.Of the trillions of dollars worth of asset-backed securities issued globally, roughly 60% had AAA credit-rating, the safest possible, according to Fitch Ratings. This is way, way too high. In sharp contrast, less than 1% of corporate bond issues are triple-A rated.

The structured products are particularly default prone in an economic downturn with substantial, correlated risks. It’s clear that the structured products were glaringly faulty. As we. in India moving for more reforms in the financial sector, which includes creating scope for new products, we need much more for skilled human resources and credible supervision . We do need to draw the right lessons from the crisis abroad and implement. Its the far sight that matters!!!!!!!!

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