Recovery of the mortgage markets will be gradual, but will result in a greater resiliency for the financial system, Federal Reserve Board governor Randall S. Kroszner said yesterday.

The recovery and repair of the mortgage markets “will be a gradual process that requires both market and regulatory discipline,” Kroszner said, according to prepared text of a speech he delivered at a bank supervisors conference in Florida.

“Greater transparency and less complexity in credit instruments will help to promote broader scrutiny of credit risk,” he said. “Investors with more and better information from the originators and sponsors of credit products will be able to more easily conduct proper due diligence and verify evaluations of credit risk. Financial institutions that develop and hold these instruments and that have similar or correlated exposures through various business lines should also strengthen risk-management practices. As supervisors, we must insist on effective risk management and take the steps necessary to ensure that changes are implemented where needed.”

To repair risk evaluations, Kroszner said, credit-rating agencies need to be more skeptical about “complex and opaque instruments” and “clarify that a given rating applied to a complex structured credit product may have a different risk than the same rating applied to a simple security, such as a corporate bond.”

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