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Institute of International Finance Report

 April 09, 2008 06:32 PM

The Institute of International Finance has announced:

A report embracing the critical issues in today's financial markets has been published by the Institute of International Finance (IIF), the global association of financial institutions. "The leadership of our industry recognizes its own responsibility to restore confidence in the financial markets, solve the problems that have arisen and prevent those problems from recurring in the future. We are fully committed to raising standards and improving best practices in the financial services industry," stated Dr. Josef Ackermann, Chairman of the Board of Directors of the Institute of International Finance (IIF) and Chairman of the Management Board and the Group Executive Committee of Deutsche Bank AG, speaking on behalf of the IIF's Board of Directors.

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Some of the recommendations are priceless:

The suggestion has been made that some firms would find it useful to have at least as a portion of members of the risk committee of the Board (or equivalent) individuals with technical financial sophistication in risk disciplines, or with solid business experience giving clear perspectives on risk issues, consistently with the overall need for the Board to have the skills necessary to conduct meaningful review of management's actions to manage risk, as to manage other aspects of the business.

Even more basically – but this did not exist at all firms – Boards need to understand the firm's business strategy from a forward-looking perspective, not just to review current risk issues and audit reports. It should be the duty of senior management to review with the Board how that strategy is evolving over time, and when and to what extent the firm is deviating from that strategy (e.g., when a strategy morphed into heavy dependence on conduits or on structured products).

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… whereas some recommendations, to the extent that they have any meaning at all, are dangerous:

Taking the view that consistent achievement of high standards requires a shared sense of norms and yardsticks to help avoid backsliding, the IIF will recommend a suite of best practices to be embraced voluntarily, perhaps in the context of a "code of conduct" to which the world's leading financial institutions could subscribe. Because there are substantial differences in business models, mix of business, exposures, regulatory oversight and culture, there is unlikely to be a single solution to any issue that would be optimal for all firms and all circumstances. Thus, "best practice" as used here is not a legal obligation but a high standard for firms to apply in developing solutions appropriate to their own situations.

As usually discussed, and as is ideal, "best practice" can mean "Don't be afraid to learn from others". Those who have any experience in the matter will know that "best practice" really means "tick these boxes and don't you dare think about what you're doing".

There are a number of recommendations dealing with the issue of managers not talking to each other, which echoes the finding of the International Report on Risk Management Supervision.

The IIF continues to highlight the problem of pro-cyclicity:

Basel II can make a substantial difference to the stability of regulated institutions. One of its main strengths is sensitivity to risk.

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