One line of conversation was the appropriate regulatory response. He for one believes that the Fed and other regulators (particularly the SEC) will be asking themselves how they missed the signs of the crises. He mentioned that one real problem is that the financial engineers working in these investment banks have tools and incentives that put them far ahead of the examiners assigned to make sure these institutions are not placing undue stress on the financial system.
As anyone who is on the receiving end of an examination from a banking regulator knows, examiners are perpetually behind the times. The question to ponder is, "should examiners be up-to-speed with current business practices?" I suppose at heart, none of us want examiners to be truly aware of just how far we are pushing the envelope. However, when they miss signs such as those that indicated this looming problem, isn't the retaliatory legislative and regulatory response much worse than sharing the scope of our strategy?
We do not need additional regulation. If anything, we need to loosen the strings a bit. What we do need is to provide examiners with better training, advanced risk analysis tools, and in general a concerted effort to broaden their skills. Adding regulation will be a vast waste of money. Equipping regulators with better informed and educated examiners is a much better investment.
On the subject of analyzing risk, we are putting the finishing touches on a risk analysis consulting program. Many institutions are not quite sure the extent of their exposure to risk. Our program provides an analysis of this exposure along with recommendations for mitigating the risk. Look for details soon!
