This paper from University of Massachusetts focuses on the ultimate cause of the global financial crisis. It suggests that, the flawed institutions and practices of what is often referred to as the New Financial Architecture (NFA), the globally integrated system of bank conglomerates and the so-called ‘shadow banking system’ of hedge funds, investment banks, and special investment vehicles, are responsible for the global financial crisis.
It traces the evolution of NFA and discusses its structural flaws. Key issues covered are: (i) that the efficient capital markets theory accepted by regulators, even though weak, is misleading; (ii) the incentives embedded in the NFA, which lead to excessive risk taking; (iii) that mortgage-backed securities, central to the current boom, are too complex to have been priced right, and that they thus eventually collapsed when the boom-time optimism faded; and (iv) a high generation of leverage by the NFA.
Paper can be found here
Supplement to our doom and gloom diet, CBI/PwC released financial services survey. The highlight from my perspective is on page 8 about the depressing mood of securities traders in relation to their business. Particularly a negative balance statistic of -92%.
Click here to get the survey publication.
Ever wondered about what different approaches are out there to regulate and supervise the financial services? Considering the environment these days and anticipated regulatory tightening, there is an excellent piece of thought leadership in this space. The Group of Thirty G30, released its new report “The structure of financial supervision – Approaches and challenges in a global marketplace”. The report reviews 17 regulatory systems (ie, The jurisdictions reviewed are Australia, Brazil, Canada, China, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, Qatar, Singapore, Spain, Switzerland, the United Kingdom, and the United States.)
It assesses the four approaches to financial supervision currently employed
across the globe (Institutional, Functional, Integrated, and Twin Peaks); and describes the key design issues of each supervisory model, illustrates how each has been implemented
in practice, and assesses the strengths and weaknesses of each approach.
I cannot share the full version due to copyrights issue, but the executive summary can be downloaded here
Lehman Brothers’ 158-year old run came to a grinding halt this weekend. The biggest banking bankruptcy ever.
Perhaps this was long waited since 1999, when depression-era Glass-Steagall act was repealed? It all comes down to capital, size of balance sheet and reliance on wholesale markets for liquidity. See below for more details:
Lehman Brothers files for Bankruptcy (including European counterparties)
PwC Says Unwinding Lehman Brothers Could Take Years
Watch the LIBOR
Excellent article in Harvard Business Review on secrets behind successful strategy execution. It is illustrated through a case study, whereby restructuring yeilds immediate results but the problems (or their symptoms) crept back in – until they decided to identify and address the root cause.
Focus should not be restructuring but rather identifying what and where it goes wrong – then appropriate change implementation and management as required.
See this link for the Executive Summary (I strongly recommend to subscribe to HBR for full article)
KPMG has released a whitepaper which leverages the insights and perspectives shared at a forum which brought together nine internal audit directors from leading financial institutions including Barclays, BMO Financial, Goldman Sachs, Credit Suisse, Bank of Nova Scotia, Morgan Stanley, Lloyds TSB, RBS and provided the opportunity for the group to identify key business drivers for change in today’s global financial services marketplace.
Key discussion points were around:
– Integrated Assurance Model
– Continuous Auditing and Technology
– Internal Audit’s Role
– Balancing Stakeholder Expectations
– Risk-Based Approach
– The Right People
The whitepaper here also highlights key action steps for Internal Audits to take to help meet expectations in 2010 and beyond.
FSA releases report on protection of consumer data within Financial Services industry. This review was carried out by FCID (Financial Crime and Intelligence Division) of FSA – In summary, it highlights the need for improvement in current practices deployed in the financial services industry for protecting consumer data. It also highlights and acknowledges a few good practices currently in place.
Main findings were around following themes:
– Training and Awareness
– Staff recruitment and vetting
– Physical Security
– Disposing of customer data
– Managing third-party suppliers; and
– Internal audit and compliance.
Click here for detailed report