WITH investment and credit-rating agencies partly blamed for purportedly misleading investors into buying risky securities and fanning the flames of the global credit crisis, Asian bankers are urged to lessen their dependence on these institutions in assessing risks and making investment decisions.

This is one part of a broad set of measures, outlined in a position paper entitled “Lessons from the Global Financial Crisis for Asia” that the Asian Bankers Association (ABA) issued on Friday at the end of its 26th general meeting and conference in Manila.

“There should be less dependence on optimistic statistical analyses by credit agencies and more reliance on one’s own due diligence,” says the two-page position paper.

The three major credit-rating agencies—Standard & Poor’s, Moody’s Investors Services and Fitch Ratings—have all been criticized for giving high grades to structured investment products such as mortgage-backed securities (MBS), the issuers of which paid for the ratings of these agencies.

These structured products were subsequently downgraded or went into default, which resulted in a crisis that led to the collapse of several big institutions that held such assets in their portfolios.

“The complexity and opacity of securitization makes it difficult for banks and investors to assess the risks involved,” the ABA says in its position paper.

 It says the creation and purchase of credit derivatives such as MBS, collateralized debt obligations and credit-default swaps “must take into account asset-price movement, leverage and systemic risk.”

A veteran fund manager, Mark Mobius, recently warned of another financial crisis that may be triggered by the failure to effectively regulate derivatives, which had contributed nearly $1.5 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of the crisis in 2007.

Mobius reiterated his warning, previously reported by news wire agencies, during a recent forum in Manila. The executive chairman of Templeton Asset Management Ltd. in Singapore believed that “political pressure” from investment banks and all those who make money in derivatives will prevent these financial instruments from being adequately regulated.

According to Mobius, outstanding derivatives—contracts used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather—total nearly $600 trillion, about 10 times the size of the global economy.

One of the important lessons from the crisis, according to the ABA, is the need to ensure sound financial innovation and effective financial regulation and supervision.

“Following financial liberalization and globalization, financial innovation has boomed,” its position paper says. “However, financial regulation was not equipped to see the risk concentrations and flawed incentives behind the innovation.”

As a result, the group says regulators cannot adequately address the problems and risks arising from financial innovation, within existing legal framework.

“For Asian countries, the ABA proposes a rethinking of institutional arrangements for financial regulation and supervision,” it says.

The group is seeking an extended perimeter of financial regulation and supervision in the region to cover investment banks, hedge funds, private asset pools, mortgage brokers, credit-rating agencies and securitization vehicles.

The appetite for such risky financial instruments as derivatives may wane following the crisis that shook particularly the world’s biggest financial institutions, some bankers say. Regulators are also seen becoming more sensitive toward risk-control systems.

Jose Isidro Camacho, managing director at Credit Suisse, said such significant changes in the capital-market landscape, particularly in the West where the crisis started, were expected and will impact Asia.

The Filipino banker, now based in Singapore, said complex financial products that demand leverage will face obstacles in terms of reduced client and market appetite in absorbing such products.

Camacho, who served as energy secretary and later as finance secretary in the early years of the administration of President Arroyo, was one of the speakers during the two-day ABA conference.

“We in the financial industry will have to adapt to these new realities. First, without doubt it will be back to basics for the industry as a whole,” he said. “Basic services and strategies where the central focus is on client needs and a retreat from products with complex financial structures will be the way forward for most institutions.”

Some 120 bank executives and bank regulators from countries around the region attended the ABA conference hosted by Rizal Commercial Banking Corp.