June 18, 2009
7 pillars of US Financial Regulatory reform & the European Systemic Risk Council - The new blueprint
Risk & Compliance Managers, Private Equity(PE) firms, Hedge Funds, Credits firms and Consumers, in the USA and global financial markets are going to remember this week for a long time to come due to the epic changes in the financial regulation and supervision. I had blogged earlier about move to regulation from the light touch supervision. The latest US proposal on financial regulatory reform does skew towards tighter regulation.
In the EU summit starting today, a tighter financial market regulation is being discussed with 2 extra mandates for EBC - a European Systemic Risk Council and a body to set standards for closer supervision of banks, insurers and other firms. The European Systemic Risk Council, is proposed to be chaired by the European Central Bank president but will include central banks and the EU Commission representation to look at broader interlinked systemic risk issues.
The proposal is still evolving and subject to congress approval, but a quick summary of the 7 key areas and the possible impact on Regulatory Risk Management and compliance functions:
1. Consumer Protection Regulator - The UK FSA took a lead with having TCF (Treating Customer Fairly) approach but US has gone one step ahead with this new proposed agency with oversight over mortgages, credit cards, savings accounts and annuities.
Impact: World of retail financial services would have new tighter regulatory requirements.
2.Executive Pay:Investors to have a greater say in executive pay
Impact: Link of executive pay to risk management
3. Private Equity and Hedge Funds Regulation: Under Federal regulation.
Impact: Demand for Risk Management & Regulatory compliance professionals in Hedge Funds and PE firms.
4. Mortgages & Asset backed securities: Firms need to hold a portion of the loans they package and sell. E.g. 5% for ABS firms. This contrasts with the 20% proposal in EU.
Impact: Huge change in business models of many firms that are essentially in mortgage origination business to move to portfolio risk management business. ALso big impact for the underwriters of asset backed securities as they need to retain a 5% stake to improve asset quality.
5. OTC Derivatives business model: All standardized contracts derivatives contracts to be traded on regulated and transparent venues such as exchanges or electronic marketplaces and cleared centrally to reduce risk.
Impact: Deeper integration of Derivatives business with exchanges;
Greater emphasis on Risk management at exchanges; Emergence of Clearing houses as a critical Risk management institution.
6. Insurance Supervision - Possible Single Federal Regulator instead of a distributed regional state regulators networks.
Impact: Streamlined and efficient regulatory reporting
7. Financial Services Oversight Council - A consolidated group comprising all regulators to oversee systemic risk.
Impact: Less confusion on who does what
There is much more to share about the European proposal but that is a blog by itself. so watch out for next blog.
Exciting times ahead for all of us, as i do believe a lot of risk management, and regulatory compliance roles should open up in all these bodies. Happy hunting !
Posted by spachava at 03:14 PM
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June 10, 2009
How does one manage Risk in Bad banks ?
Recently we keep hearing new terms such as good bank, bad bank , toxic assets. Interesting times, as a bank and financial institution to me always denoted rock solid trustworthy entity.With many countries exploring bad banks concept in one way or the other, I wonder on the role that risk managers play in bad banks. Is it any different than the traditional role ?
There was talk about creating a bad bank in the US as well that seems to have gone quiet now, given that TARP money is being given back by some firms. Last week a German draft legislation was introduced that allows the country’s state run banks, Landesbanks to move illiquid assets into bad banks. This sounds slightly familiar - I remember 2 govt. entities in Malaysia - Danamodal and Danharta that were created with asset restructuring charter to take on the troubled assets of the country’s financial firms battered by the 1997 Asian currency crisis. In my humble opinion, these 2 institutions actually did quite well in terms of stabilizing the financial system.
Given the scale and enormity of the systemic risk today, the questions that comes to a simple mind like me are - what do Risk managers in these bad banks do ? Is their approach and function any different from a good bank ? Are they starting from a different baseline and different benchmark ? What kind of MTM, pricing and valuation curve would they use ? Would there be a different counterparty risk criteria? Also would risk managment be more short term view as in terms of an interim caretaker or a liquidator mode? Questions, Questions and more questions. Still seeking answers but does make me think that the future Risk courses need to include some learnings on managing risk in bad banks,if that terms continues to survive post crisis.
Posted by spachava at 06:39 PM
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June 03, 2009
SEC tweets on twitter too - Digital Assets Risk Managment- Has its time come?
Digital Assets Risk Mgmt as a key management priority? US President's 10-point Cybersecurity Action plan
Blogs, Wikis, Twitter, Facebook, Linkedin, Secondlife - all start to become key component of the millenial generations activities at workplace and lifestyle. Its but natural that even regulatory bodies such as SEC and stock exchanges start to embrace twitter to boost their transparency and and outreach to the net savy investors.
In a development that will have a wide reaching impact across the world, US president Obama last week released his 10-point plan to secure and protect digital infrastructure. I see this as a part of a broader recognition of the need for Risk mitigation practices in the increasingly digital world with almost 1.5 billion people being online or logging in. This plan calls for an enhanced coordination between public and private sector.
To me this explicit recognition of the information and underlying digital infrastructure as strategic assets, could be a quantum leap forward in accelerating the slow paradigm shift of how digital information risk is perceived and managed today at senior executive levels. I believe many other countries and industry sectors will follow suit.
Many questions come to the mind. Just as this plan calls for an updated national strategy to secure the information and communication infrastructure, will many corporates follow suit in terms of Designating digital assets risk management as a key management priority; awareness around digital assets; global digital assets management policy framework etc ?
Does this mean that companies will start to have a specific Digital Assets Risk Management plan, that includes Reputation Risk management, Online Assets compliance and a digital identity plan that combines the customer secuirity and privacy aspects of customers in the new online business model ?
What do you think ?
Posted by spachava at 10:24 PM
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