The Institute of International Finance is launching a body to keep an eye on the markets for signs of emerging risks to financial system stability, the IIF announced Friday.

The so-called Market Monitoring Group, which will be co-chaired by former Bank of Canada governor, David Dodge, and Jacques de Larosière, former managing director of the International Monetary Fund and former governor of the Banque de France, will be asked to “detect market developments, vulnerabilities, and potential dynamics giving rise to systemic risk, in the form of mis-priced assets, excessive leverage, crowded trades, concentration risk, etc.” It will also explore ways to mitigate such risk, the IIF said.

“The crisis has revealed the serious need for the financial services industry itself to have a process in place that looks ahead at potential systemic risks and can, as appropriate, issue clear messages and suggest measures to reduce the identified risks. The MMG, which has been established by the IIF’s board of directors, is expected to play a critical role in contributing to greater responsibility,” said Josef Ackermann, chairman of both the IIF board and of the group executive committee of Deutsche Bank AG.

The IIF, the leading global association of financial services institutions, will serve as the MMG’s secretariat. IIF managing director Charles Dallara noted that the MMG will serve as an early warning system. “Looking back at the origins of today’s crisis there is no doubt that many financial institutions underestimated the scale of risks and the potential scope of the threats to the stability of the financial system. Indeed, recent years have seen too strong a focus on short-term opportunities. It is essential now, as we look to sustaining a more stable and efficient financial system in the future, that we strengthen efforts to understand the medium-term implications of current trends in international finance with particular emphasis on prospective systemic vulnerabilities.”

IE