Big banks are still flying blind
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.