Bold leadership to solve systemic financial risk and scandals

By James Benoit, CFA President, CFA Society Mauritius

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Let me, from the onset, cite my fellow associate Kurt Schacht, JD, CFA who is MD Standards and Financial Market Integrity of CFA Institute: “Is the LIBOR rate fixing scandal “another harsh reminder of the “profit at all costs” mantra banks pursue as their only true religion? We are left feeling that “customers be damned” is the real mission statement for these institutions. Consider this, however: If rates are fixed artificially low to avoid paying higher interest on deposits or money funds products, you might think you would correspondingly pay less on money borrowed at this manipulated, but lower, LIBOR setting. Details are sketchy as to how many banks are involved and whether they could artfully fix LIBOR to their advantage in both directions, in any event. Meanwhile, there are reports that bank regulators themselves may have actually encouraged these banking firms on where to set LIBOR. Maybe it’s not so bad after all?”

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At CFASM (CFA Society Mauritius), we too are concerned to know just what went on and what went wrong so we can get to good policymaking and rule enforcement on this and many issues. But Kurt notes that, instead of deep thoughtful reform and sustained implementation, market participants now worry that “regulators resorted to lots of questionably legal measures in the name of financial emergency and improvisation in too-big-tofail crisis management.”

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To help policymakers deal with this, CFA Institute and the Pew Charitable Trusts are concerned enough about such “improvisation” and the lack of progress on systemic risk oversight that they have convened a new council to spur progress. This group, the Systemic Risk Council, is calling for prompt and effective action to rein in systemic risk and too-big-to-fail institutions.

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Sheila Bair, the former FDIC chair in the USA is leading the Systemic Risk Council and she is forthright. Recently writing for Yahoo Finance she has expressed great frustration:

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“The Dodd-Frank Wall Street Reform Act, the landmark law enacted on July 21, 2010, was designed to end the kind of risk taking, greed, and avarice that brought us the financial crisis of 2008. Yet, notwithstanding thousands of pages of proposed and final rules to implement this important law, nothing much seems to have changed (…) Traders still feel they are masters of the universe, misappropriating customer funds, making outsized bets in the derivatives markets and fixing interest rates. Some of them apparently think that laws are made to be broken if they can improve their year-end bonuses. But after all, wasn’t that the lesson learned from the hand slaps they received for the subprime mess? We’ve got a culture problem on the trading desks of the world’s leading financial institutions (…) And why in the world didn’t U.S. and U.K. regulators simply tell Barclays and other banks back in 2008 when reports of attempted manipulation first surfaced that they needed to use actual transactions in submitting Libor rates as opposed to their best guess about the current costs of interbank borrowing? The subjectivity built into the Libor process was ripe for abuse.

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Regulation is still needed

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“The lesson of all of this goes directly against two decades of the mantra of “self-correcting” markets. Financial institutions cannot be relied upon to do the right thing, when doing the wrong thing will line their pockets. Regulators, not banks, need to set the rules and they must be clear, straightforward, and readily enforceable.

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“Yet, still, we see regulators who are too timid to take on major financial interests. Instead of just saying “no” they try to placate industry lobbyists by creating this clarification or that exception, resulting in indecipherable rules that are hundreds, and in some cases, thousands of pages long (…)

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“As a former regulator, I want my colleagues to s쳮d. We need a regulatory system focused on the public interest, not the special interests. And we need strong, credible, influential voices that will weigh into the debate on the side of the population at large. This is why The Pew Charitable Trusts and the CFA Institute have created the Systemic Risk Council, a group of prominent academics, financial experts and former government officials formed to monitor the Dodd-Frank implementation and speak out when needed reforms go awry.”

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At CFA Society Mauritius we too have reached to local regulatory bodies for providing them with all the resources we have at our global disposal. It is vital for an emerging, open financial centre like Mauritius to get it right. And soon.

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That is the latest blog of my fellow associate, Kurt Schacht, JD, CFA who is MD Standards and Financial Market Integrity of CFA Institute - http://blogs.cfainstitute. org/marketintegrity/author/kurtschacht/