As the global banking sector convulses with the most comprehensive restructuring in memory, voices on both sides of the Atlantic are calling for tighter banking regulation in order to prevent a future meltdown. Heads had to roll and a number of senior executives have lost their jobs, while others find themselves inadvertently turned into civil servants operating state-owned banks.
Relatively speaking, that was the easy part. The question now is: how to regulate the industry better without stifling financial innovation?
There is no shortage of ideas coming from European and US regulators, many bad (executive pay caps, short sale bans), some good (clearinghouses for private financial contracts). The only thing we can say for certain is that there will be amendments to existing Basel II and Mifid regulations, as well as new initiatives to increase disclosure and fiddle with capital adequacy rules.
As a participant on the margins of financial markets, I hope regulators err on the side of improving the transparency and liquidity of existing financial innovations, rather than try to constrain the complex financial products whose reckless distribution got us into this mess.
The fact is that every link in the chain of this financial crisis -- subprime mortgages, credit default swaps, counterparty defaults, off-balance sheet investment vehicles -- was beset by the same fundamental problem:
(a) gauge value, and
(b) understand dependencies.
This was an information crisis. The new financial instruments and their markets simply got ahead of risk managers', CEOs' and regulators' ability to keep track of them. And this is in spite of all the technical tools to manage this information being readily available.
We have a vested interest in this problem, through our investment in FRSglobal. Until this year, FRS provided necessary but unexciting solutions to banks to calculate risk and to automate regulatory reporting. Today, FRS is talking to regulators all over the world about how to improve everyone's visibility of risks and interdependencies among banks. FRS CEO Steve Husk blogs about these issues here.
The crisis is the catalyst that is finally bringing together risk management, business analytics and reporting -- a 3-way marriage software vendors and consultants have talked about for a decade, but which no one has yet consummated. It's time for CFOs to have a single view of risk exposure, and to report on that view to both their boards and the regulators.
To this end, FRS has made two acquisitions in the past 3 months: Swiss-based vendor of integrated risk management solutions IRIS (see Gartner's take here), and SAP/Business Objects subsidiary SECAM+, a specialist in regulatory reporting for the UK securities industry.
Traditional ERP and even banking systems vendors acknowledge that the new paradigm of risk management and reporting is a highly specialised activity, requiring purpose-built analytical tools and extensive banking domain knowledge. For this reason, incumbents like SAP and Temenos are partnering with FRS to deliver unified risk management to their clients.
It's only the beginning of the consolidation in this market and a lot of uncertainty remains. But to death and taxes, we can undoubtedly add 'more regulation' to the list of certainties.