Mitigating the Risk of Reform. Scotch, Please.
May 7, 2010
During my flight to SIFMA’s operations conference in Palm Desert, I was thinking about proposed financial regulation, the bedlam of last couple of years, and wondering how in the world this country and this industry landed on a financial precipice.
Maybe it was the altitude (or the three scotches) but I seemed to experience a flash back to 2002 after the tech bubble burst.
At that time there was widespread anger at banks’ dodgy practices and reckless behavior, and an insistence that investors and regulators needed to be more vigilant. The post-bubble backlash gave rise to useful new regulations, but it had no discernible impact on Wall Street ‘s actual business.
Why are we here again?
Greed is certainly part of it. Easy money; which the tech bubble … I mean the housing bubble …seemed to promise. Or both.
Interestingly, after 1929 it took three decades before Wall Street seemed safe again,and there was almost a decade between the scandals of the late eighties and the boom of the late nineties.
By contrast, the backlash of the tech-stock bubble lasted barely a couple of years.
That’s a good argument for passing the financial reform legislation currently in front of Congress-before investors suffer another bout of amnesia. As President Obama said last week, we need to learn the lessons of this crisis, so we don’t doom ourselves to repeat it, as Santayana might put it. Maybe this time we can remember not to forget.
I arrive in Palm Desert and suddenly I experience my own amnesia regarding all of the above, and settle in on this fantasic resort. Back in the saddle this morning, my head clear, my spirits optimistic I can begin to concentrate in the issue at hand.
The current regulation in front of Congress and how it will deliver the financial industry back to its previous glory.
I hear all the basics that we have all been hearing for a while.The US House Committee on Financial Services’ Wall Street Reform and Consumer Protection Act, which is currently making its way through the US legislative process, is seeking to rectify a number of inadequacies in light of the failure of Lehman Brothers.
The proposed regulation is placing emphasis on tracking systemic risk, so regulators can spot parent-subsidiary-business partner connections easily, all of which requires data standardization.
Risk systems will also need to be updated to take into account off-balance sheet activities of these firms, as well as allowing them to produce new reports for capital and liquidity risk requirements. A more holistic approach to risk data is therefore on the cards for U.S. firms, much like the requirements of the UK Financial Services Authority (FSA) in this regard.
Transparency and disclosure are two key buzzwords, and this will translate into requirements for firms to produce more granular data in their regulatory reports.
This includes the OTC derivatives market and data concerning capital and liquidity risk exposure, as well as a Central Clearing operation for “standard” OTC securities to name just a few.
