FSF warns of weak credit risk management

After a two-day meeting in Sydney, the Financial Stability Forum has warned that the credit derivatives industry is still poorly prepared for a crisis, although the financial industry as a whole remains strong.

The forum, representing regulators and central banks from around the world, said that "market and macroeconomic conditions remain benign" and financial markets had become more resilient.

However, members warned that the system could come under strain from high household indebtedness, external imbalances or an excess of liquidity leading to low risk premiums.

In particular, counterparty risk management was highlighted as a problem - firms were urged to speed up their work on operational risk and "issues of transparency with regard to credit derivatives". The forum also warned financial authorities to prepare for the impact of an outbreak of avian flu.