Viewpoint: System Needs an Overhaul, Not Tweaks

By Ludwig, Eugene A. | American Banker, May 16, 2008 | Go to article overview

Viewpoint: System Needs an Overhaul, Not Tweaks


Ludwig, Eugene A., American Banker


The current financial crisis has solidified the belief among many of the sector's keenest observers that we need to remake the major supports of our financial services infrastructure. Here are some of the pressing issues.

* Who should regulate financial services, and how?

* How should financial firms conduct risk management?

* Is the accounting for financial firms adequate?

* Do the laws and regulations limiting the flows of funds between banking and nonbanking entities need to be modernized?

* When, how, and to whom should we extend the federal safety net?

Extensive evidence supports the belief that fundamental change is needed. There's no denying that the vulnerabilities of our system have been laid bare over the past nine months. The weaknesses of diagnostic and risk mitigation tools have been exposed.

Regulatory breakdown. Many of the world's most astute financial leaders thought last summer that the subprime mortgage disruption was a minor matter involving a relatively small class of homeowners. Harsh reality was obscured by a regulatory system that provided neither transparency for nor oversight of the activities and exposures of the vast majority of counterparties in our financial system.

For example, the regulatory community could not or did not stop pervasive, unsound practices in the mortgage brokerage industry, including fraudulent documentation. Every day it is becoming more apparent that these practices will prove toxic not only for subprime and "alt-A" borrowers, but also for many who have been classified as prime credits.

And we are not talking about the occasional scam. We are talking about millions of borrowers and over $1 trillion of lending.

At the same time, regulated institutions - often engaged in the same businesses as the unregulated financial world - are subject to an omnipresent regime. This enveloping system did not spare them from the mortgage crisis, even though it has subjected them to hundreds of millions of dollars of fines and compliance costs that unregulated institutions hardly have to think about.

Such regulatory imbalance creates many problems. The unregulated industry, at least for a time, can produce better returns on equity than the regulated one, thus attracting capital and pushing the regulated industry out on the risk curve to compete.

Risk management and financial modeling. Despite considerable advances, modern risk management has not proven up to the task. Risk managers and other executives could not measure the extent of risk across their enterprises, or they could not value their positions, or they could not control traders, or they were not listened to, or all of the above. Not a pretty sight.

Even now, with institutions starting to engage in self-analysis regarding the financial crisis, we are coming to appreciate the intense strains the mammoth financial services firms have been under. Overseeing multiline businesses over multiple geographies with hundreds of thousands of employees is a herculean task. In this regard, the commendable work certain large institutions have done in examining their own problems, including their inability to integrate risk measurements across the financial services platform, is most revealing.

Accounting systems. Whether or not new rules have produced a clearer picture of financial reality - a highly debatable point - they certainly have created counterproductive volatility. We have found our accounting and other regulations to be almost entirely pro-cyclical. They were instrumental in ensuring that the banking industry went into this crisis with loan-loss reserves that have proven inadequate.

Accounting rules have made acquisitions by strategic buyers more difficult. They have led to financial statements based in part on what the Street refers to as "mark to make believe."

Potential sources of assistance. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Viewpoint: System Needs an Overhaul, Not Tweaks
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.