Busted: Bankers and The Global Economy

February 26, 2008

Fed Expects More Banking Crisis Events

Governor Randall Kroszner spoke recently on Risk Management, clearly in a rambunctious mood. “You cannot manage your risks if you do not know what they are. Managers of financial institutions need to ensure that they fully understand the risks assumed by each of their institutions’ business lines, and for that they need high-quality information–both qualitative and quantitative.

As covered on this website, this has been a major issue for bankers and traders to the point of driving the marketplace to bankruptcy. He publicly chided senior management for failure to closely examine banking and instrument risks. He also recommended that institutions think about ways to alter existing compensation schemes for banking traders to include some types of deferred compensation, since the risks of certain investments are not always immediately clear. This is especially true since so many existing instruments are still in the marketplace. Krosner emphasized the use of Basel II banking regulations recently deployed over the old banking standards of Basel I.

Senior management at financial institutions should ensure that they have complete and timely information about risk and demonstrate the ability and will to act on it. They should also be aware that the next crisis could come precisely in the area where they are most exposed or have weaknesses. That is, a certain degree of humility is wise, because all firms have a limited understanding of what might happen next.” Krozner insists that supervisors and banking managers take the time to follow up risk assessment measures in a concrete way. Reading between the lines, Krozner admitted in his speech that he expects another crisis or set of events from banking weaknesses and that bankers will likely create more problems if they persist in neglect. He admits to his own limited understanding and dogmatically insists that all firms have limited ability to cope as well as understanding of the market and how their banking instruments operate within that market.

Wow, that is news behind the scenes.

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