Monday, March 30, 2009

Smarter regulation, not more regulation

With many expecting the imminent meeting of the G20 group of countries to shake up the financial regulatory landscape, commentators believe that the rest of the world will follow the UK's call for broader financial services reforms.

PJ DiGiammarino of think tank, JWG-IT, expects that there will be a "big push" by the G20 to support the de Larosière and Lord Adair Turner (chairman of the FSA) recommendations. " A serious rework of capital adequacy, liquidity, hedge fund control, offshore oversight, remuneration and the supervisory architecture is now on the cards - starting this year," he states.

The UK financial services regulator, the FSA, has indicated that in future regulatory supervision will take the form of "making judgments on the judgments of senior management". The US is talking about the need for firms to be able to measure their counterparty exposure enterprise-wide within a matter of hours, not days or weeks. However, there are those that maintain it is about smarter regulation, not more regulation, says Charles Ilako, partner, global regulatory practice, PricewaterhouseCoopers.

Sceptics, including myself, believe that little 'meat' is likely to come out of this week's G20 meeting. Those looking for specifics are likely to be disappointed as the G20 group of countries is hardly in agreement on many matters, with countries like China and Brazil apportioning most of the blame for the current crisis on Western governments, regulators and financial service providers.

And despite utterances to the contrary, protectionism is likely to creep in as national governments and regulators look to prop up domestic institutions at the expense of foreign financial service providers.

Pricewaterhouse calls for a global financial regulatory body to coordinate regulation globally, but there are many unresolved questions as to how such an arrangement could work in terms of governance and structure (will certain countries have more say or be given more weighting than others, for example).

PricewaterhouseCoopers suggests making global the European Systemic Risk Council, but regulatory supervision will still be required at the national level and the enforceability of anything a global or supra-national regulator says or recommends is questionable and likely to be at the behest of national regulatory bodies.

While the new world of financial regulation is raising the bar, all this talk of enterprise-wide risk management does not bode well for banks, who let's face it do not have a true enterprise-wide view of their risk or exposure, as this tends to be measured in operational silos.

"We typically find the trader doesn't have a detailed view of the stress tests, the CFO doesn't know the reliability of the reference data and nobody knows who owns the record," says DiGiammarino. "Key information needed for integrated risk management and regulatory compliance is locked in isolated silos and no single individual, or even a single operating committee, has an overall view."