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Fear of the dark

British Prime Minister Gordon Brown yesterday called on financial institutions in the City of London to be more transparent about the risk associated with the kinds of financial instruments that have contributed to the global credit crisis.

Collateralised debt obligations (CDOs) - tranches of asset-backed securities and structured credit products - were considered low-risk by the major ratings agencies, but turned out to include many sub-prime mortgage securitisations with borrowers that subsequently defaulted. What is more, even banks that had not invested directly in sub-prime mortgage securitisations or CDOs turned out to be exposed to them through funds, counterparties and institutional clients.
Even with the top standards of risk reporting in place, we still do not know the full extent of sub-prime losses in many multi-national banks.

All in all, the sub-prime lending crisis has demonstrated how opaque the Western financial system can be when it comes to risk.

So imagine trying to work out which Middle East institutions are exposed to high-risk assets.

International banks - and any institution that wants to do substantial business with international banks - will have implemented Basel II, a system which quantifies and mitigates an organisation's risk, by January. It is not a comprehensive solution to risk management, but it is the bare minimum for any bank with a sizeable balance sheet.

Many Middle East banks will meet the implementation deadline, but a great number will not. The wishy-washy approach of some of the region's Central Banks has certainly not helped.

Information on the activities of this region's financial institutions, and their exposure to different kinds of risk, is limited, to say the least.

If London thinks it has problems with transparency, where does that leave the Middle East?

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