The ERM Current™

The much anticipated regulatory reform proposal from the new Obama administration is nearing completion according to a report today in the Wall Street Journal.  The aim of the proposal is to streamline the byzantine regulatory framework within which U.S. financial institutions have been operating for many decades.  Here is what the WSJ had to say.

Top Obama administration officials are close to recommending that Congress create a single regulator to oversee the entire banking sector, people familiar with the matter said, a departure from the hodgepodge of federal agencies that failed to contain the financial crisis as it ballooned out of control last year.

The new agency is expected to be a major plank in a proposal that Treasury Secretary Timothy Geithner and White House officials send Capitol Hill in a few weeks with the goal of overhauling supervision of financial markets.

The new bank regulatory agency could prove controversial because it would consolidate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and strip supervisory powers from the Federal Reserve and the Federal Deposit Insurance Corp.

The Fed and the FDIC would gain other powers, though, as White House officials want the Fed to be able to oversee systemic risks in the economy. They also want the FDIC to have new powers to take large financial companies that aren’t banks into receivership.

While the outcome of the proposal is far from certain, one thing is certain – major regulatory change is on the horizon. Is your company prepared to manage this change?  Wheelhouse Advisors can help.  Visit www.WheelhouseAdvisors.com to learn more. 

In a speech last week to the Banque Centrale du Luxembourg, Vice Chairman of the Federal Reserve Donald Kohn provided a thorough analysis of events leading to the current financial crisis.  A major portion of his remarks focused on the inadequate investment in risk management by many financial institutions.  In his view, the long period of relative stability in financial markets bred a high level of complacency and inattention to the growing risks.  As he stated,

“Complacency contributed to the unwillingness of many financial market participants to enhance their risk-management systems sufficiently to take full account of the new (perhaps unknown) risks they were taking on.”

Risk management should be a primary focus of all companies, financial and non-financial, at all times.  It is precisely the moment when profits are at their peak and economic times are good that companies should be most vigilent.  Now, we are in catch-up mode and must make greater investment in risk management to ensure complacency does not become part of the risk equation again.

The Group of Twenty (“G-20″) met in Washington, DC on Saturday to jointly develop action plans to address the growing economic crisis sweeping the globe.  A need for greater transparency and accountability in our financial markets served as the primary theme for the meeting.  The result of their discussion was a strong declaration regarding the root causes of the problems we are facing and recommended actions to remedy the situation.  One of their action plans focused squarely on risk management.  Below are the related risk management actions to be taken by the end of March 31, 2009.  

• Regulators should develop enhanced guidance to strengthen banks’ risk management practices, in line with international best practices, and should encourage financial firms to reexamine their internal controls and implement strengthened policies for sound risk management.
• Regulators should develop and implement procedures to ensure that financial firms implement policies to better manage liquidity risk, including by creating strong liquidity cushions.
• Supervisors should ensure that financial firms develop processes that provide for timely and comprehensive measurement of risk concentrations and large counterparty risk positions across products and geographies.
• Firms should reassess their risk management models to guard against stress and report to supervisors on their efforts.
• The Basel Committee should study the need for and help develop firms’ new stress testing models, as appropriate.
• Financial institutions should have clear internal incentives to promote stability, and action needs to be taken, through voluntary effort or regulatory action, to avoid compensation schemes which reward excessive short-term returns or risk taking.
• Banks should exercise effective risk management and due diligence over structured products and securitization.

A great deal of work will be required to properly address these recommendations.  However, the end result will be a much stronger global economy.  Wheelhouse Advisors can help your company quickly assess its risk & control programs and provide cost-effective solutions to the recommended actions.  Visit our website at www.WheelhouseAdvisors.com to learn more.

The primary focus of most CFOs these days is credit and liquidity.  However, during a crisis such as the one we are experiencing, it is easy to become distracted and lose focus in other critical areas.  Compliance is one of these areas and with the recent election results, it is sure to be an area of great risk in the months and years to come.  Here’s what Barry Bregman, a partner with CTPartners in New York, had to say about the topic at CFO.com.

That’s not to say compliance has fallen by the wayside, especially at a time when the government is looking even harder at the operations of financial-services companies. “CFOs should make sure they have their eye on that ball and that they have the right people managing those functions.”

Wheelhouse Advisors is equipped to help CFOs and their organizations maintain the proper focus on risk management and compliance with cost-effective solutions.  Visit www.WheelhouseAdvisors.com to learn more.

For those of you who have studied Finance and Investments, you are certainly familiar with the father of Modern Portfolio Theory, Harry M. Markowitz.  Mr. Markowitz earned the Nobel Prize in Economics for his recognition of the benefit of diversification in reducing risk in a given portfolio of securities.  In yesterday’s Wall Street Journal, Mr. Markowitz was quoted on the role of financial engineers in today’s financial crisis.   Below are his remarks.

“Diversifying sufficiently among uncorrelated risks can reduce portfolio risk toward zero,” he says in an interview. “But financial engineers should know that’s not true of a portfolio of correlated risks.”

More specifically, Mr. Markowitz is referring to the financial engineers who created the mortgage-backed securities using tranches of various types of mortgages and touting their diversification benefits.  What they failed to mention, was the fact that risk is not mitigated when using similar types of securities with correlated returns.  Not only is risk not mitigated, it is exacerbated like throwing gasoline on a fire.  I guess those involved in creating this mess either fell asleep in class the day Modern Portfolio Theory was discussed or simply sold a pack of lies.  In either case, they were playing with fire and a whole bunch of people got burned.

When you think of a swamp, what comes to mind?  Murky, squishy, and difficult to find your way through? Well, the same can be said for today’s Governance, Risk & Compliance (“GRC”) software marketplace.  There are many vendors crowding the market with all sorts of products that address various components of GRC. However, it is extremely difficult for companies to determine what software may be best suited for their processes and environment.  That’s because the software market and the products themselves are evolving continuously.  

Wheelhouse Advisors can help you determine not only your requirements, but also the solutions that are best suited for your company.  It starts with gaining a solid understanding of your GRC process design and overall vision for the desired end state.  With that in hand, Wheelhouse Advisors can then work to help you successfully navigate through the swamp to find a software product that will enable your program to reach its fullest potential.  

Visit www.WheelhouseAdvisors.com to learn more about how we can help your company Navigate Successfully™.