Looking for That Fine Line: SEC Commissioner Cynthia Glassman Explains What's Happening with the Much Delayed "Pushout" Rules and Offers Her Thoughts on Managing Risk. (US Securities and Exchange Commission)(includes Related Article)
Blount, Ed, ABA Banking Journal
Managers of banks must cope daily with exposures that arise from their market and credit operations, and even from their supporting computer operations. As a rule, the last measure of their success in managing those risks has been recorded on the income statement, to the extent that a bank's unexpected losses are lower than its peers. But that's starting to change. The new risk metrics are reaching beyond the p&l to the balance sheet, at least if bank supervisors have their way. In fact, the cost of poor risk management is moving beyond the balance sheet to the strategic plan and the banking charter.
Much has been written about how the new risk-weighted capital rules, still in formulation, will raise the minimum capital requirements for poor risk managers.
At its heart, the new Basel Accord is being designed to stop certain banks from growing and even to cut them back. If their managers show they're unable to manage risks well, the banks are required to carry more capital. That threat alone will force bank managers to redefine their core business models. But the new capital accord is not the only new supervisory initiative with strategic implications.
Far less has been written about the Securities and Exchange Commission's efforts to create rules for bank managers to control the risks to their customers from poorly-managed conflicts of interest, failures in corporate governance, and the customers' own misinformed or misdirected expectations. As mandated by Congress, the SEC must work out the administrative rules for implementing Gramm-Leach-Bliley, Sarbanes-Oxley, and many other sweeping legislative actions. Some of these rules, especially those affecting securities broking operations in trust departments, may have as profound an impact on the franchise of U.S. banking, as on the banks who violate those rules with internal control failures. Banks could find themselves not just losing money on a particular business or having higher capital charges, but they could actually be out of the business.
To frame the current SEC agenda, Contributing Editor Ed Blount discussed a range of issues that may affect banks' strategic risks during a meeting with Commissioner Cynthia Glassman at SEC headquarters in Washington, on Nov. 18.
Glassman is the longest serving member of the Securities and Exchange Commission, having been appointed by the President in January 2002. She was then, and is now, the only economist among three attorneys and one MBA on the commission. By her own characterization, Commissioner Glassman is more likely to bring a perspective on risk-return and cost benefit analysis to the SEC's deliberations. She is also inclined to focus on the economic and business realities in evaluating newly-proposed financial disclosures, accounting rules, and market structure issues, as well as in the pending "pushout" criteria by which Congress, in Gramm-Leach-Bliley, mandated the SEC to determine which securities activities are to be pushed out of banks into SEC-regulated subsidiaries of the holding company.
BLOUNT: There's been a long list of reforms proposed since the accounting and corporate governance scandals of the last couple of years. Could you comment on the Public Company Accounting Oversight Board's (PCAOB) current proposal to require an external auditor's opinion in addition to, or in lieu of management's attestation to the validity of the internal controls in public companies?
GLASSMAN: It wouldn't be appropriate for me to comment on something that is out for public comment. However, I can say this: it's important that it be management's process for ensuring that the internal controls are adequate and that the financial reporting accurately reflects the state of the business. The internal auditors must work with management to make sure that those controls are in place and that the CEO and CFO understand, and are comfortable with, the way those controls are working. …