WASHINGTON – Banks need to take a much broader view of investment risk as they dig their way out of the current financial crisis, and mortgage-backed securities need to become simpler and much more transparent, a senior U.S. Federal Reserve official said on Monday.
“Not only do banks need to assess counterparty credit-worthiness and behavior on an individual basis, they also need to assess counterparties on a collective basis,” Fed Governor Randall Kroszner said in remarks prepared for delivery at a conference on risk management in Geneva. They need to understand how their own actions to protect positions can put pressure on key counterparties, especially when other market participants are likely to be taking similar action to protect themselves, he said. The financial turmoil of the last 18 months showed risk managers failed to anticipate how individual investments could be negatively affected by broader market stress, he said.
