Debt Crisis Report: Management of Risk in Central and General Banks

This report discusses the recent sovereign debt crisis and the reflection over the banking sectors that are present in the European countries. It scrutinizes the capital provisioning related to the portfolio, results and the responses of the policies. The report consists of a detailed discussion and explanatory review of the management risks in the central and other general banks.

Running head: DEBT CRISIS REPORT
Debt Crisis Report
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Table of Contents
Introduction......................................................................................................................................2
General Principles that are applied for the management of risk......................................................2
The acknowledgement of the credit risks by the Central Bank.......................................................3
Assessment of the aspect of credit in the euro system.....................................................................4
The link between the liquidity and the credit risk...........................................................................5
Conclusion.......................................................................................................................................6
References and Bibliography...........................................................................................................7

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Introduction
This particular study aims to discuss the recent sovereign debt crisis in regards to the
reassessment of the sovereign ratings belonging to the different EU countries. The study further
consists of a discussion and aims to analyze the recent sovereign debt crisis and the reflection
over the banking sectors that are present in the European countries. Furthermore, the capital
provisioning related to the portfolio, results and the responses of the policies has been discussed
and scrutinized in this particular study.
In the risk, conference that takes place annually the ECB emphasizes the importance on
the practices related to the effective management and the development of the financial sector.
Moreover, the report will result in the displaying of the challenges and the practices related to the
management of risk that the financial institutions of the country along with the central bank has
been facing collectively. The alteration in the type of financing problems is one of the major
reasons for the facing of such problems. The aspect of financing is a huge process that consists of
the factors, which influence the process of financing, and the risk associated with it. It must be
noted here that between the financial years of 2009 and 2010 the imbalances that have been
fiscal in nature has resulted in the levels of volatility that are high. In regards to the financial
events, it had been assumed by the financial sector that the participants of the market will result
in the dishonoring of the financial obligations that will increase the credit risk, associated. It
must be further understood that the aspect of credit risk consists of two essential elements like
the defaulting of the security holders and the counterpart risk that has been involved in the
transactions that are proceeded over the counter (Afonso and Leal 2017). Therefore, it can be
concluded that the report consists of the discussion that is detailed in nature and consists an
explanatory review of the management risks in the central and other general banks.
General Principles that are applied for the management of risk
The principles that have been applied by the financial institutions for the purpose of
managing the risks which took place in regards to the financial crisis in the mid 2007 has been
accepted but not explained in details. It must be noted here that the term credit monument aims
to cover a varied degree of features which can be listed down as follows:
 The counterparties should be known
 The investment should be proceeded only in the products that can be understood

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 The outsourcing of the policies related to the management of the credit risk should be
carried out by putting the reliance on the credit assessments that have been external in
nature
 The reliance should not be put upon quantitative models
The risk management policy that has been established by E. Gerald Corrigan and Stephen
G.’s original counterpart risk management policy that will result in the providence of a better
knowledge in regards to the factors that are related to risk management in order to strengthen the
financial systems. Furthermore, it has been stated that a specified trend should be highlighted
which has been reflected in the previous years in regards to the reliance on the aspect of external
assessment for managing the credit risks. A handful of financial institutions or rating agencies
will result in the provision of such assessments. In order to handle the recent financial crisis the
importance of the credit rating agencies have been huge. Moreover, it can be evidently stated that
the credit rating agencies have become the role model of the economy (Amstad and Packer
2015).
Furthermore, the credit rating agencies have also been subjected to criticisms. This means
that these agencies have been subjected to the questions in regards to the methodologies adopted
by them in regards to the transparency of the areas of finance and the conflicts of interest arising
from such situations. The performance of the agencies in the previous years has also raised
potential concerns. The aspect of credit rating has been made mandatory by the different
legislative bodies and regulations and other supervisory bodies, which establish regulations.
These bodies have made the aspect of financing so important that the financial policies that have
been established by the financial agencies has become majorly important for the purpose of
ensuring the diligence of the investors at the time performing the evaluations of the results that
have been provided by the credit rating agencies. Therefore, these agencies are trusted in such a
way that they become the seal of approval in regards to the behavior of the investors. The credit
rating agencies have been one of the most important financial regulations in regards to the aspect
of debt financing (Cohn 2016).
The acknowledgement of the credit risks by the Central Bank
It is evident from the current situations that the central banks are not subjected to the risk
of liquidity in regards to their own personalized currency. The central bank controls the market.

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Moreover, the banks also result in the attraction of the credit risks. The person or institution
defaulting the loan result in the losses that result in the buffering of the financial portfolios. The
implementation of the financial policies for the purpose of protecting the financial stability help
the central bank to control the scarcity of the financial resources and the loss that has been
undertaken as a result of the defaulting of the loans. It must be noted here that if the process of
recapitalization becomes important in regards to the government then the central bank will be
able to take over the aspect of independency of the monetary authority.
It can be further stated that the framework in regards to the management of risk is not
required. This is because the central bank will result in the following of conservative policy that
has been important in the management of risk. In regards to the financial crisis, the central bank
tends to follow risk tolerance policy, which is totally different from the conservative policy and
has been adopted by the different financial institutions. This means that during the time when the
different factors of financing like the defaulting of the loans and the losses suffered due to it have
been cut down upon by the different financial institutions, they relied on the interbank market
with the help of increased margin in regards to requirements. This reflects the significance of the
framework in relation to the management of risk that has been established by the central bank
(Cohn 2016).
Assessment of the aspect of credit in the euro system
The euro system has been established for the purpose of strengthening the framework in
regards to the assessment of the risk in the financial crisis. It has been mentioned in the article
18.1 of the ECSB that all of the operations that have been conducted by the ECB and the
National Central Banks (NCB) should be adequate for the purpose of supporting the credit
standards that are high. The euro system has been designed for the purpose of meeting the
standards. Moreover, the information that is required for the purpose of conducting the credit
assessment is derived from the different sources. For instance, the sources of information that
can be depended upon are the External Credit Assessment Institutions (ECAI) and the systems
that have been developed on the basis of the Internal Ratings (IRB) systems and the tools that
have been used by the third parties and the private enterprises. Furthermore, it has been reflected
that the In House Credit Assessment Systems (ICAS) provide the required range of information
to the euro system. Along with the euro system, the standards of credit are also analyzed and

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examined for the purpose of providing the guarantee and the protection to the holders of
instrument which have been similar in nature. it should be also noted here that the euro system
results in the monitoring of the performance of the accepted credit assessment system.
It should also be stated that the euro collateral framework has resulted in the launching of
a consultation for the public, which consists of the information in regards to the different types of
loans and the details in regards to the asset backed securities that is an essential requirement of
the securitized transactions. These standards, which are of the highest quality, will result in the
adequate analysis of the risk that has been involved in the asset pools of the asset backed
securities. Therefore, it can be understood that they will not depend upon the assessments, which
have been provided by the third parties during the period of crisis.
Lastly, the most important element of the euro framework is that it carries out its ratings
beyond the ones that are provided by the ECAI. In this kind system, it can be stated that the
system reserves the right for the assessment of the risk management prospects that has been
dependent in regards to the fulfillment of the assets which have the highest credit standards (De
Santis 2014).
The link between the liquidity and the credit risk
The aspect of liquidity risk is very important in regards to the management of the credit
risk. This means that the financial institutions that have been deficient in regards to the
providence of funding of the assets that have been complicated in nature have resulted in the
triggering of the assets that have been complicated in nature and has resulted in the financial
crisis.
It must be further stated here that the Basel Committee had resulted in the issuance of the
management for the purpose of consultation along with the standardized set of documents. It has
resulted in the promotion of the international framework for the management of the liquidity
standards so that the importance of the liquidity risks can be understood and acknowledged. The
two liquidity standards that have been issued can be listed down as follows:
 A minimum liquidity coverage ratio – this means that the banks should possess enough
liquid assets for the purpose of repaying its short term debts and liabilities

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 A net stable funding ratio that should be of a longer period of time – this means that the
banks should get hold of the funds in order to ensure a stable source of income. It must be
noted here that this amount depends on the liquidity characteristics of the financial
institutions in regards to the assets and the other business operations that have been
carried out by the corporate entity within the specified financial year.
It has been understood that the Central banks are the primary bodies that regulated the
market and establish the policies at the time of financial crisis. It should be noted here that the
proposal has not been adequate for the situations that did lead to higher risk concentration.
Moreover, the factors that led to higher amounts of risk had not yet been considered.
The ECB, on the other hand has potential interest in regards to the proposal that has been
conveyed by the Basel committee. This is because it leads to the connection of the standards in
regards to liquidity risks which have to be implemented within the monetary policies. Moreover,
it should be noted here that the liquidity standards that have been proposed should be reconciled
and the different impositions on the financial institutions should be accounted for. Furthermore,
it is recommended that the financial institutions like the banks should maintain proper financial
metrics without having to compromise their operational efficiency and should try to rely more
upon the guidelines and policies of the Central Bank (De Santis 2014).
Conclusion
Therefore, as it can be concluded from the above discussed piece of literature, the role of
the Central Bank becomes very important in case of the occurrence of financial crises. Thus, the
policies that are established by the regulatory body should be properly and accurately complied
by the other financial institutions.

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References and Bibliography
Afonso, A. and Leal, F., 2017. Sovereign yield spreads in the EMU: crisis and structural
determinants.
Amstad, M. and Packer, F., 2015. Sovereign ratings of advanced and emerging economies after
the crisis.
Bekaert, G., Ehrmann, M., Fratzscher, M. and Mehl, A., 2014. The global crisis and equity
market contagion. The Journal of Finance, 69(6), pp.2597-2649.
Brooks, S.M., Cunha, R. and Mosley, L., 2015. Categories, creditworthiness, and contagion: how
investors' shortcuts affect sovereign debt markets. International Studies Quarterly, 59(3), pp.587-
601.
Cohn, T.H., 2016. Global political economy: Theory and practice. Routledge.
De Santis, R.A., 2014. The euro area sovereign debt crisis: Identifying flight-to-liquidity and the
spillover mechanisms. Journal of Empirical Finance, 26, pp.150-170.
Kalemli-Özcan, Ṣ., Reinhart, C. and Rogoff, K., 2016. Sovereign debt and financial crises:
theory and historical evidence. Journal of the European Economic Association, 14(1), pp.1-6.
Singh, M.K., Gómez-Puig, M. and Sosvilla-Rivero, S., 2016. Sovereign-bank linkages:
Quantifying directional intensity of risk transfers in EMU countries. Journal of International
Money and Finance, 63, pp.137-164.