19 June 2009 Comments

 

JWG IT: US follows the world into new regulatory data pit

The US Treasury's new regulatory foundation gives the Federal Reserve the authority to ask for massive amounts of information from financial institutions.  The Fed will be charged with the task of raising the capital, liquidity and risk management standards of the systemically important institutions in line with international guidelines.  As the banks operating in the UK have seen, this means tough new requirements that require them to proactively monitor their risks and report them to both their board and the regulators in real time.

According to PJ Di Giammarino, chief executive of the JWG-IT Think-Tank, this presents challenges for proposed timelines: "Given how far behind the international community the US has been, the bar has been raised for both the banks and the regulators very fast.  The industry's complex information infrastructure will struggle to deliver in the prescribed timeframes."

Like the European Systemic Risk Council, the US will create an FS Oversight Council, comprised of all eight regulators, to identify gaps and make policy decisions.  The Council will have the authority to gather information from any firm and refer emerging risks to the appropriate regulator.  Unlike Europe, however, the US is silent on whether it plans to introduce a similar colossal new database.  This means an embryonic US regulatory regime will be hit with a big data challenge from day one and could quickly fall behind international efforts.

"Those struggling to upgrade the Basel II risk infrastructures in US banks operating in the UK will be disappointed.  Some had held out hope that the US might back away from the UK's data-intensive approach to liquidity risk standards, but this plan calls for the Fed to ‘put in place a robust process for continuously monitoring the liquidity risk profiles.'  It would appear unlikely that new invasive reporting can be avoided in 2010."

Di Giammarino continued: "As regulators ask for ever more invasive reporting across regions, clients and products, cracks will appear in the financial infrastructure.  Neither the financial institutions nor their infrastructure providers are able to control risk at this micro level across the globe today.  It is curious that such comprehensive plans could ignore decades of underinvestment in this industry's infrastructure."

"We remain concerned about the 'report first, ask why later' regulatory approach across the globe.  Without a concerted effort from regulators to understand what data they are looking for, what they are planning to do with it and how good it has to be, the costs of implementing this new global regime could be enormous.  Not only will the price quickly reach 10 digits, but the real economy's business environment could be eroded even further."