Industry experts insist that enhancing the ability to both hedge and shift these risks advances "credit risk transfer" technology. This, they say, has lowered the crisis risk for banks worldwide. There has been less focus however, on exactly where the transferred risk has ended up and why.In today's volatile economy, proper risk management is as essential as any other part of an organization's operational infrastructure. A recent ft.com article analyzing some of the biggest challenges corporations are now facing with tackling that risk finds that the problem is usually two-fold. According to them, the first challenge is regulatory. The article stipulates that the increasingly complex market isn't something governmental agencies have the know-how to properly manage. It says that another problem is the increasing threat of regulatory changes which appear to be politically motivated. As of late, there has been a tremendous amount of focus placed upon derivative products and the extent to which their proliferation has allowed banks to manage their balance sheets in a more effective manner. Industry experts insist that enhancing the ability to both hedge and shift these risks advances "credit risk transfer" technology. This, they say, has lowered the crisis risk for banks worldwide. There has been less focus however, on exactly where the transferred risk has ended up and why.As a matter of fact, many say that this is "being borne" by new investors, those who've had previous limited access to complex derivative products. Some of these investors include insurance companies as well as both public and private pension funds who view the variety of products as a means to earn higher yeild. Investors have been buying these so-called "structured products", which ft.com says is, in itself, a catalyst for the creation of these products in the first place. These investors also bring two key issues to the table.For one thing, many of them no longer feel the need to depend on internal risk assessment and rely rather heavily on a variety of rating agencies for this reason. They are also being supervised by bodies that lack the financial sophistication that is normally found in structured products. Furthermore, it has found that the people responsible for overseeing the transfer in balance sheet risk has been falling into the wrong hands, especially when compared with bank regulators and boards. It's been said that those responsible for overseeing and supervising the balance sheets of various insurance companies and pension funds have had limited exposure to structured products. This is disturbing to a lot of people operating in a variety of sectors throughout the market and has helped to fuel political activity in regard to these investment vehicles being used to facilitate risk transfer to both insurance companies and pension funds alike. Lloyd Blankfein, chief executive of Goldman Sachs, noted that politically-inspired changes have the potential to be a lot more significant than people care to realize, sending unintentional negative shock waves through the entire system as a whole. Experts insist that the future of the international financial system depends on just how effectively systemic risk is managed. If it is left unchecked, industry insiders say it will increase because of a combination of ineffective internal due diligence, increasing dependence on rating agencies, uneven supervisory coverage as well as politically driven legislative action. Source: RiskCenter.com
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