Moody’s: Market turbulance and systemic risk

Moody’s: Market turbulance and systemic risk. In a report issued by Moody’s Investors Service: “Another False Alarm in Terms of Banking Systemic Risk but a Reality Check”: financial market commotion exaggerating risks but forcing important reality check; shock-absorption capacity of financial system in focus; sub-prime troubles not systemic in intensity. 

Some observations by Pierre Cailleteau, Moody’s chief international policy analyst:

“In addition, in the current macro-economic and financial environment characterised by ample liquidity, there continue to be marginal risk-takers ready to pick up assets at adjusted prices. As such, the current episode does not seem to raise genuine systemic risk concerns, with Moody’s core bank ratings displaying a high degree of resilience in this regard.”  

Second, and more generally, the combination of a significant wave of financial innovation with a relaxation of risk management/underwriting standards has proved to be a dangerous cocktail. “A normalisation in risk appetites will help, but the cautionary tale is that many of the observed deficiencies are likely to be enduring features of our environment — such as the inability to track risk accurately and predict risk crystallisation at times of stress, the recurrent lapses of market depth and the challenges of valuing highly customised products,” Mr Cailleteau says. “This, with hindsight, is the lasting lesson of LTCM.”  

“In an environment where insecurity is unlikely to disappear, the existence of capital cushions and strong liquidity management at financial institutions is critical. Banks and regulators should not lower their guard.”  

About Moody’s Investor Service: Moody’s Investors Service is among the world’s most respected and widely utilized sources for credit ratings, research and risk analysis. Moody’s commitment and expertise contribute to stable, transparent and integrated financial markets, protecting the integrity of credit. In addition to our core ratings business, Moody’s provides research data and analytic tools for assessing credit risk, and publishes market-leading credit opinions, deal research and commentary, serving more than 9,300 customer accounts at some 2,400 institutions around the globe.