Risk Management

Regulators Ready to Clamp Down on Banks’ Faulty Risk Data

Big financial institutions are warned to step up their risk-assessment capabilities, or else.
Iris DorbianAugust 21, 2014

U.S. financial regulators are warning some of the world’s biggest banks that if they don’t improve their ability to identify risks, enforcement actions will be taken against them, sources told Reuters.

Since the 2007-2009 financial crisis, banks have struggled to gain a stronger grasp of their trading operations and asset quality. Unfortunately, many have been thwarted by inadequate risk-management data, regulators contend.

Consequently, many financial institutions, even some of the largest ones, still have problems pinpointing threats to the U.S. financial system, Reuters reported. The article did not name the banks that are under scrutiny.

Several recent examples illustrate this weakness. Last December, the Federal Reserve Bank of New York blasted Deutsche Bank‘s U.S. subsidiaries for their “inaccurate and unreliable” financial reporting. The Fed’s criticism was believed to have followed its annual “stress test” of top banks in order to identify deficiencies.

In March, Citigroup’s capital management plan was rebuffed by the Fed, which claimed that “the bank’s internal examination process did not sufficiently consider how its sprawling business across the world would weather a hypothetical crisis scenario.”

And this past April, Bank of America said it was suspending its $4 billion stock buyback program after “it had incorrectly reported data used to calculate capital ratios to the Fed,” Reuters wrote. As a result, the Fed forced Bank of America to redo its capital plan, which had been submitted as part of the Fed’s stress tests.

The sluggish pace of some banks in streamlining their risk assessment and management systems have frustrated regulators.

Stacy Coleman, the former head of New York Fed’s bank operational risk group, told Reuters: “The process wasn’t very automated. Even today I think there is a lot more manual processing required to compile the information than supervisors want there to be.”

According to Reuters, the “sheer number of legal entities contained in large banks” is an issue. Another is that there is no “universal language to describe the highly-specialized securities and transactions the firms have employed, obscuring any bird’s-eye view of how vulnerable the world remains to another crisis.”

Source: U.S. regulators step up warnings to banks for poor risk-spotting