The ERM Current™

The Wall Street Journal reported today that regulators are increasing the scrutiny over U.S. financial institutions as Congress debates the future of the regulatory system.  This certainly comes as no surprise given the state of the economy, but many of the banks are not comfortable with the new pressure.  Here is what the WSJ had to say.

Federal regulators have escalated the number of wounded banks they have essentially put on probation, with some of the targeted banks complaining that the action is too harsh. The Federal Reserve and the Office of the Comptroller of the Currency, two of the primary U.S. banking regulators, have issued more of the so-called memorandums of understanding so far this year than they did for all of 2008, according to data obtained from the agencies under Freedom of Information Act requests. The sharp increase comes as Congress considers changes proposed by the Obama administration that would overhaul the way the U.S. government oversees banks. Many bankers and analysts believe those changes would result in an even more assertive regulatory apparatus. Regulators have been criticized for going too easy on banks and securities firms.

Regulations and their associated risk will continue to rise into the foreseeable future.  How banks respond and proactively adjust to the risk will determine who thrives, who just survives, and who fails.

The Obama administration today released their much anticipated blueprint for financial regulatory reform.  As expected, it outlines several goals of a reform effort.  The goals include the following:

1. Promote Robust Supervision and Regulation of Financial Firms
2. Establish Comprehensive Regulation of Financial Markets
3. Protect Consumers and Investors from Financial Abuse
4. Provide the Government with the Tools it Needs to Manage Financial Crises
5. Raise International Regulatory Standards and Improve International Cooperation

While these are noble goals, the blueprint document offers little in terms of specific actions other than the creation of more agencies and committees to address the concerns.  This will result in greater regulatory complexity and reduced governmental accountability.   For individual companies, this will certainly require greater investment in compliance programs to address the new governmental requirements.  Since the requirements are unknown at this point, companies will be well served to have a nimble and flexible infrastructure in place in order to adapt to the new regulatory regime.  Are you prepared?  Wheelhouse Advisors provides cost-effective solutions to help companies meet the increasing risk management and compliance demands.   Visit www.WheelhouseAdvisors.com to learn more.

As more attention is devoted to post-mortem analysis of the economic meltdown and what financial institutions can do to improve their risk management practices, it is becoming clear that regulatory and credit rating scrutiny will become much more intense.  Here is an excerpt from an article in today’s London Times that supports this view.

 ”there was the failure of external regulators and rating agencies to monitor the banks’ risk-controls. Despite deficiencies in bank management, some of the problems could have been averted with stronger checks and balances from the regulatory bodies charged to assess risk. But rating agencies undervalued risk when assessing new products. And regulators ignored the dangers of macroeconomic contagion, as well as failing to apply any independent checks to the risk models used by banks.”

How is your company preparing for the increased scrutiny?  Wheelhouse Advisors can help with cost-effective strategies to manage your risks and meet stricter regulatory requirements.  View the brief video below or visit www.WheelhouseAdvisors.com to learn more.

The regulatory reform starting gun was sounded by President Obama yesterday and it was described more as a marathon than a sprint to the finish.  However, the President was clear on the objectives of the reform as noted in the Wall Street Journal.

Mr. Obama said “financial institutions that pose serious risks — systemic risks — to our markets should be subject to serious oversight by the government.” He said U.S. taxpayers “should be assured” that the Federal Reserve, which is acting as a lender of last resort in many cases, “understands the institutions it insures and actively monitors them to keep their risk-taking in check.”

The president said the overhauled regulatory structure “must be strong enough to withstand both systemwide stress and the failure of one or more large institutions.”Mr. Obama also called for greater transparency, more-uniform supervision of financial products, and “strict accountability” for market players who engage in risky behavior. “Executives who violate the public trust must be held responsible,” the president said.

Representative Barney Frank commented on the nature of the process required to reform the regulatory structure.

Rep. Frank said he expects the effort will be done in stages, with action first on a bill that will empower a regulator, likely the Federal Reserve, to regulate risk across the financial system.  ”It’s either the Fed or you start from scratch,” Mr. Frank said.

Early preparation is critical to achieve a competitive advantage of addressing the regulatory changes in a cost-effective and efficient manner.  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more.

Last week, an article from the Wall Street Journal provided unique perspective of the current financial crisis in the United States from “across the pond” in Europe.  The article rightly points out that the crisis is not the result of a lack of regulation, but a lack of effective regulation due to overwhelming complexity and redundancy.  Here is an excerpt:

“American financial regulatory bodies have historically been fragmented. In a report published in November 2007, the U.S. Financial Services Round Table counted 10 different federal regulatory bodies with over 30,000 employees, and that’s not even counting regulators for the 50 states. The report frequently describes U.S. financial regulation as prescriptive, complex, formalistic, expensive and inefficient. Regulations often overlapped, making the same financial institutions subject to different rules and different enforcers. The U.S. regulatory landscape may resemble a jungle, but only because of all the choking vines.”

The report they reference in the article provides a very relevant example of the excessive and redundant requirements.  

“large U.S. banking organizations are being required to establish overlapping internal control reporting and compliance structures, as well as specific operational risk data collection, validation processes, and IT systems requirements. For example, the requirements of FDICIA and GLBA implicitly, and the requirements of SOX and [Basel II] explicitly, require a comprehensive system of “risk control self assessments” (RCSA) and related documentation. The cost of compliance with each of these regulatory requirements is significant, albeit difficult to quantify and segregate.”

As the U.S. works to improve the effectiveness of its regulatory system, companies also need to look for ways to streamline and improve their compliance programs.  Wheelhouse Advisors can help.  Visit us on the internet at www.WheelhouseAdvisors.com to learn more.