Is the medicine for financial services turning out to be worse than the disease?

September 9, 2011

By Susannah Hammond

LONDON/NEW YORK , Sept. 9 (Thomson Reuters Accelus) – Almost three years on from the fall of Lehman Brothers and the widespread public bail-out of financial services the world is looking grim. In the white heat of the crisis itself jurisdictions, policymakers and governments moved together to resolve the worst of the immediate issues and bought global financial services time to heal. While some recovery and mending of balance sheets has certainly taken place, global financial services continue to suffer at the hands of divergent policymakers, international recessions and sovereign debt crises.

The medium-term aftermath of the financial crisis may well turn out to be more damaging to financial services than the crisis itself. Quite how severe the current state of affairs has become was highlighted by the new head of the International Monetary Fund, Christine Lagarde, who stated that “there remains a road to recovery, yet, we do not have the luxury of time”. The risks to any recovery are increased by “a growing sense that policymakers do not have the conviction, or are simply not willing, to take the decisions that are needed”. 

Lagarde made some very strong statements about the decisions that need to be taken including the urgent recapitalization of European banks with the most efficient solution being the mandatory substantial recapitalization seeking private funds first but using public funds if necessary. Only this will cut what she called “the chains of contagion” from sovereign finances. Lagarde concluded: “we must act now, act boldly and act together”.

The issue with needing to act in a globally consistent and coherent manner is that all parties must agree on not only the big picture but also the detail of the action to be implemented. Unlike in the first aftershocks of the crisis there would now appear to be precious little agreement on the precise nature of actions to be taken to rebuild stability and confidence in financial services. European policymakers have already made public their disagreement with the comments made by the head of the IMF. Even supranational initiatives coming out of the Financial Stability Board and the Basel Committee are diverging as they begin to be implemented in different ways and to different timetables around the world.


There is further growing divergence of opinion on the infrastructure and architecture for financial services and indeed for sovereign structures themselves with eminent voices calling for everything from the closure of the US Securities and Exchange Commission to a north/south split of the euro zone with the northern block setting up its own currency.

Following a summer of raging discontent in the global markets and no end in sight for detailed agreement on internationally coordinated remedial actions, where does that leave financial services firms? It might be very tempting to simply pull up the drawbridge and retreat as much as possible from trying to navigate the external storms but firms need, indeed must, continue to engage with policymakers at both a domestic and international level. There are a series of practical steps which can be taken to ensure that firms emerge from the ongoing uncertainty as robust as possible, including:

— Resolution plans: the production and maintenance of recovery and resolution plans has become an essential discipline for many firms. It is not just a question of liquidity and funding arrangements though these are fundamental. Anecdotal evidence suggests that the exercise, while often initially prompted by supervisors, has thrown up a range of issues from the lack of a group licence for an essential piece of software to critical outsourcing arrangements only being contracted to certain group companies.

All firms should consider the need to undertake a resolution plan exercise. It may seem like just another thing to be done when workloads are already huge, but it could make all the difference in a crisis situation. If nothing else all firms should assess the risks or events which could cause all or part of their firm or group to fail.

— Lobbying strategy: firms need to agree at the highest level an overarching strategy on lobbying for each jurisdiction in which they operate. In particular firms need to develop and agree what “good” looks like for their business activities at both a domestic and international level. As part of the overall strategy firms need to be prepared to engage at all levels of financial services policymaking.

As is becoming all too apparent political and policymaker infighting and blunt disagreement as to the future of financial services regulation around the world is damaging the chances of agreeing the required coherent international action plan. Firms themselves are best placed to assess the impact of the layers of reform being proposed. The vacancy lists at the new European supervisory agencies and budget constraints elsewhere show that many policymakers are woefully understaffed. It is not altruistic for firms to step into the widening breach on global regulation rather it can be seen as positive regulatory risk management. Firms should work to ensure that any and all new rules agreed achieve the desired objective and do not overtly conflict with any other requirements.

— Resources: in troubled times the best possible protection for firms is to maintain skilled risk management resources in-house. Many firms are cutting staff numbers, but those firms which wish to have the best chance of a long-term future in financial services will continue to invest in relevant risk, audit and compliance skills.

This continuing investment is not just in terms of the people, but also in terms of a suite of protective and detective controls and other corporate governance infrastructure. It might sound self-evident but firms can only truly thrive if they know, and understand, exactly what is happening where in the business. Too often in the past pockets of business developed in which senior managers only had the haziest idea of the activities undertaken and the risks being run.

Again, anecdotally, if the business line made a profit senior managers were prone to let the area simply do its own thing. In future, firms cannot allow that to happen and strong, well-resourced risk functions are a key part of senior managers being fully informed of all risks arising in the business.

The storm clouds for financial services appear to be gathering again. Firms need to ensure that they are as prepared as possible for the future if the policy medicine administered to heal them in the wake of the 2008 financial crisis does not turn out to be worse than the disease itself. To return to Lagarde: “In sum, risks to the global economy are rising but there remains a path to recovery. The policy options are narrower than before, but there is a way through.”

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete ( ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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