In addition, a bank must have a clear understanding of an HLI’ s operations and risk management capabilities. The Committee observed weaknesses in each of these areas. Let me give a few examples. The Committee found that banks did not obtain sufficient financial information to allow for a full assessment of how much and what types of risk had been assumed by large HLIs. In particular, banks did not obtain the information needed to measure leverage. They also did not have sufficient information to understand HLIs’ concentrations in particular markets and risk categories, or their exposure to broad trading strategies. BIS Review 27/1999  2  Similarly, banks generally did not sufficiently understand the ability of HLIs to manage their risks. Because risk profiles can change from one day to the next, or even from moment to moment, it is necessary for a bank to be sure that the HLI can effectively manage its business operations and risks on an ongoing basis. In general, we did not find sufficient reviews of HLIs’ risk management systems and their underlying assumptions, back office systems used to manage daily operations such as collateral and liquidity, and the major accounting and valuation policies. Exposure Measurement The Committee also thought that banks need to develop better measures for determining the credit exposure resulting from different types of trading activities.
Along the way of trying to solve different policy problems transparency and openness have been important features to us and helped us to increase credibility for our actions. The clearer the principles and rules are that guide policy, also in the financial stability area, the better. Given the complexity of European policymaking and the many different national aspects involved I think that the arguments for this clear framework and for rules are even stronger on a European level although perhaps more difficult to obtain. BIS Review 85/2000  4