14 July 2010 News

 

SunGard: banks not ready for risk regulations

Tom Groenfeldt

The regulatory world of risk management is changing and many banks are unprepared. "Banks are in a circular conversation with dates heading toward us rather rapidly," according to Marcus Cree, solutions director for SunGard's Adaptiv business unit.

Cree was speaking at the company's New York City Day in New York last month. Working from the results of a recent survey by InteDelta and SunGard, he provided an overview of progress in risk compliance, and the conclusions weren't pretty.

Incremental risk charge, an incremental charge for credit-related risk in the trading book, is one of the older regulations in the world of risk, said Cree, yet 40% of banks said they were in the planning stage, 50% had developed models and only 10% were in implementation.

In collateral management, almost 40% of respondents said they need more people and systems, he added. "That amounts to 70% of the banks which participated are not geared up to handle collateral."

Cree said that there is a real risk that banks will not be able to meet regulatory compliance requirements, so the organisations themselves will be at risk.

Tom Day, managing director of risk and policy for SunGard's Ambit business unit, returned to SunGard recently after a stint working on the financial crisis with the TARP committee's allocation group in Washington. Reflecting on the stress tests administered to the nation's largest banks, he said they showed internal systems are in dire shape.

"One bank could produce on a monthly basis only 60% of their balance sheet. For 40% they had to proxy. That was shocking. This is not a good situation. I think there has been a lot of underinvestment in the last 18 months."

He suggested regulators were playing a curious role, citing a speech by John C. Dugan, a former bank lobbyist who runs the Office of the Comptroller of the Currency and is widely seen as a defender of the banks. In an April speech at the Richmond Federal Reserve, Dugan said that he doesn't expect stress tests to continue as a regulatory requirement because banks don't have the internal systems to handle them. He never suggested that banks ought to improve their internal systems to be able to supply the required information on a regular basis.

Day said he finds Dugan's reasoning weird.

If banks were hoping for sympathy from the risk and regulation panel, they were likely disappointed. Bob Selvaggio, a consultant and former vice president for risk analysis at Fidelity, said new regulations are aimed at problems that the banks brought on themselves.

"This is the fixing of costs that have been passed on to society. The costs should be internalised. Major banks have ignored major risks, like counterparty risk and wrong way risk, which has been understood since at least 1998."

The panellists agreed that the increased capital costs would hurt profitability and may cause banks to exit certain businesses because the capital requirements would make them unprofitable. Selvaggio said that should push banks to put more emphasis on improving efficiency. Meanwhile, he argued for a different view of risk management in the business.

"Until we get to risk-adjusted return on capital (RAROC) more front and centre with boards and shareholders, you are not going to find that executives view the risk management function as a strategic function integral to their business. We need to develop the view that we are not traffic cops but we are partners with the business. Regulators are doing us a service by pointing out the importance of what we do."

A longer version of this article will appear in the July/August issue of Banking Technology, published on 26 July 2010. Register here to get your regular copy.