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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 June 18, 2009 03:14 PM
Considering the extent of use of electronic equipment (obviously including computers), there have to be stronger regulation on the system design, implementation and supervision as well.
In my books, the next disaster will come from buggy systems that support compliance, trading and other such activities.
Some regulators may ask for a dump of all transactions and hence want to analyse data themselves.
Computer and network System (I used the word loosely) supervision is another pillar that needs to be available.
Posted by: D N Prahlad at June 19, 2009 04:55 AM
Pretty good post. I just stumbled upon your blog and wanted to say
that I have really enjoyed reading your blog posts. Any way
I'll be subscribing to your blog and I hope you write again soon!
Posted by: Mary at June 24, 2009 03:16 AM
Thanks for taking the time to digest & summarie the contents of the latest regs - a thankless task.
Key question for me remains how to manage those banks deemed Too Big To Fail - my own view is to explicitly price the implicit guarantee received by such entities - preferably with an exponential curve so that twice as big means more than twice the cost - and then let the market decide when the cost of guarantee becomes too big so that shareholders voluntarily agree to demerge. Allied to that an intervention process is required, (a) to manage bankrupcy of a large firm, or (b) force demerger (eg as the US Gov't did with AT&T or Standard Oil).
However, I smile when I see the title of your blog - 7 pillars - as this reminds me of the great work of literature by T.E. Lawrence, The Seven Pillars of Wisdom.
("Wisdom hath builded her house, she hath hewn out her seven pillars:" Proverbs 9:1.)
Posted by: Dr. Oscar D. McCarthy at July 3, 2009 12:18 AM
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