Bankers try to head off regulation threat
Date: 10-04-2008
Source: Financial Times
The world's banking industry is determined to act to restore confidence in financial markets - and thus head off the threat of significantly tighter regulation.That was the thrust of the message delivered yesterday by the Institute of International Finance, the global bankers' association, as it unveiled its response to the financial market turmoil since last August.
"The leadership of the financial industry fully recognises its own responsibilities to restore confidence . . . we are resolved to do our utmost to clean our houses first and not leave it to the regulators to do that for us," said Josef Ackermann, the IIF's chairman and head of Deutsche Bank.
The report outlined steps that could be taken to prevent a repeat of the crisis that could be implemented largely through voluntary codes of conduct. Mr Ackermann made clear that banks did not expect the widespread use of taxpayers' funds, except for targeted assistance in the US housing market. Neither banks nor investors should be "bailed out", Mr Ackermann said, but public authorities needed to take "a co-ordinated policy mix approach, and that is exactly what the Americans are doing," to avoid a long-lasting economic slump.
The IIF's proposals, to be firmed up in a final report in the summer, focus on steps that can be taken by banks - to be policed with better disclosure and a code of conduct - but also at other institutions. Some proposals amount to a significant admission that many banks failed in practices that were supposedly basic.
A key area where the committee sees banks could do more to help themselves is in their risk management. It admits events of recent months "have raised questions about the ability of certain boards properly to oversee senior managements and to understand and monitor the business".
It calls for better governance and a stronger risk culture in many firms. Rick Waugh, the Scotiabank chief executive who chaired the committee, said oversight and understanding of risk needed "a voice at the highest level of management".
The committee warns against excessive reliance on particular sources of funding and criticised banks that rely too much on modelling in their risk management decisions.
The same message applies to stress testing - a method of testing how a bank will perform during worst-case scenarios, which banks want to remain under their control rather than be directed by the authorities. The IIF accepts that stress tests have often been mechanical and not taken into account links between different risks, and proposes that they should test "severe but plausible" scenarios in future, the definitions of which will be much wider after 8 months of a global credit crisis.
Higher levels of transparency are also pledged. The committee is considering practical measures to improve information for investors, such as standardised offer documents for structured products. Countering one of the criticisms of banks' "originate and distribute" model - that institutions parcelled out credit while minimising their own exposure themselves - the committee said it was considering making banks disclose how much of particular products they had kept on their own books.
Recommendations for transparency also extend to the vexed issue of incentives for staff. The report acknowledges compensation policies should be more related to long-term profitability - taking better account of banks' cost of capital, not just revenues. It admits that efforts to make compensation consistent with shareholders' interests have been unevenly applied.
The IIF has risked a clash with ratings agencies - on which investors often relied for guidance on products they were buying - by proposing the sector should adopt externally-monitored standards for checking their methodologies.
On the valuation of products for which markets are no longer liquid - where "mark-to-market" accounting has been criticised for adding to the scale of write-downs and nervousness - the IIF report suggests a "circuit breaker" could be introduced, to "limit the destabilising downward spiral of forced liquidations, writedowns, and higher risk and liquidity premia".
Another proposal is for a "market monitoring group" - 10-20 senior financial statesmen to flag up early warnings of vulnerabilities. And while believing self-regulation will work for banks, the report calls for currently unregulated mortgage originators to be held to the same standards of due diligence expected of banks.
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