Big banks are still fly­ing blind

Pittsburgh Post-Gazette - - Perspectives -

An ed­i­to­rial from Bloomberg View

Know thy­self,” goes the Del­phic maxim. You’d think it su­per­flu­ous ad­vice for the world’s big­gest banks — that global-fi­nance ex­ec­u­tives would in­sist on a com­plete pic­ture of the risks they take. Yet the crash al­most a decade ago showed they didn’t know enough. And their in­vest­ment in self-aware­ness falls short. When fi­nan­cial mar­kets came un­der stress, the banks lacked timely and re­li­able in­for­ma­tion on their ex­po­sure to ma­jor coun­ter­par­ties. As a re­sult, nei­ther they nor reg­u­la­tors could fully un­der­stand the risks posed by the Lehman Broth­ers bank­ruptcy, or the ex­tent to which the fi­nan­cial sys­tem was linked to a sin­gle Lon­don-based unit of U.S. in­surer AIG. Since then, global reg­u­la­tors have been striv­ing to put this right. In 2013, the Basel Com­mit­tee on Bank­ing Su­per­vi­sion pub­lished a set of stan­dards: Sys­tem­i­cally im­por­tant banks should be able to col­lect timely, ac­cu­rate data on their risk ex­po­sures at an en­ter­prise-wide level and pro­vide concise re­ports to ex­ec­u­tives. Yet five years on, most banks still can’t do it. Ear­lier this year, the Basel com­mit­tee re­ported that only one of 33 banks had fully com­plied. A sep­a­rate sur­vey by McKin­sey and the In­sti­tute of In­ter­na­tional Fi­nance found they were ac­tu­ally slip­ping be­hind. No­table weak spots in­clude bad data en­try and in­com­pat­i­ble data­base sys­tems. Then there’s the reg­u­la­tory chal­lenge of un­der­stand­ing in­ter­na­tional data. If, for ex­am­ple, a large Euro­pean bank were heav­ily ex­posed to China via in­vest­ments in third coun­tries, how would any­one see the whole pic­ture? In this case, pa­tience is no virtue. Reg­u­la­tors should act now to en­sure that they and the banks know what’s go­ing on.

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