New Study: What's Next for Banking Legislation, Regulation? Interview with Eva Weber of Aite Group
Aite Group, the Boston-based financial services analyst firm, takes a stab at answering this question in a new report "What Next? Legislative and Regulatory Response to the Financial Crisis."
In an exclusive interview, Aite Analyst Eva Weber discusses:
Weber focuses on the regulatory and compliance issues facing financial institutions. Recent research has focused on anti-money laundering, risk management, fraud, and bank regulation at the federal and state levels. She brings to the position research and analytical skills gained in five years as a practicing attorney, and has helped Aite Group clients respond to major regulatory initiatives, such as Sarbanes-Oxley, the Bank Secrecy Act, the USA PATRIOT Act and new bankruptcy laws.
Weber has presented before the BITS Fraud Steering Committee and at user conferences for Metavante and Postilion. She has been quoted in leading press outlets, such as Associated Press, USA Today, The Boston Globe, and The Atlanta Journal-Constitution on mortgage industry regulation, and more broadly in trade publications, such as American Banker and The Greensheet.
TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are talking today with Eva Weber, analyst with the Aite Group. The Aite Group has just come out with an interesting new report called "What's Next? Legislative and Regulatory Response to the Financial Crisis." Eva, thanks so much for taking the time to talk with me about this report.
EVA WEBER: My pleasure Tom.
FIELD: Now it's sort of an obvious question here, but what would you say was the impetus for this new study?
WEBER: Well, I think we all realize that the recent goings on in the mortgage and securities market spell future regulatory and legislative changes. Over the past several months members of Congress have gone out of their way to explore what experts and industry players have to say about how the financial crisis has unfolded, what are some possible resolutions and how best to avoid such situations in the future.
The sense I get from talking with institutions and from tracking regulators and lawmakers comments is that we are about to see a fundamental shift. Where the last decade was essentially a laissez faire in respects, such as some lending practices, particularly among mortgage brokers. The perception is that attitude has produced economic disaster, and it is not just a paper disaster. Consumers are suffering, mortgages are underwater, unemployment is rising and consumer confidence is in question.
The result is that legislators are going to take a more activist position in protecting consumers and we wanted to know what that meant in practical terms.
FIELD: So Eva, what specifically did you look at to draw your analysis for this report?
WEBER: There is a select number of organizations of course that influence the kind of legislation or regulations that we are talking about, industry lobbying groups, consumer protection groups and legislative committees that drive decision making. The picture of what banks can expect started to become clear after analyzing the positions of those different groups as well as after looking at the issues that regulators have come under fire for, such as oversight of consumer lending and risk management.
Another key ingredient lies in weighing the potential positive effect on consumers partly balanced by the potential burden that will be placed on banks.
FIELD: Now as I understand it, you've got sort of three areas that you make recommendations on. What are some of the baseline recommendations coming out of this study?
WEBER: Well, generally consumer protectionism is rising to the fore, and banks need to be ready. Particularly knowing that lawmakers are looking closely at bank activities, banks need to be more proactive in making their own changes before mandates are issued.
Risk management will require more focus, a concerted shift toward enterprise-wide risk management will be necessary. And, because of the fallout experienced from collateralized debt obligations and credit default swaps, internal processes around valuating credit and market risk will need to be stepped up. Lending practices will also need to be scrutinized and tightened. Consumer facing efforts such as disclosures need to be revisited.
Loan products should also be reevaluated to ensure that consumers are receiving more positive than negative impact from these products and just generally, banks need to be prepared to adjust their business strategies to account for some of these changes coming down the pike.
FIELD: Now one of the areas that interests me certainly is looking at the regulatory landscaping, and we know Treasury has already earlier this year offered up a plan for restructuring the banking regulatory agencies, and I suspect that this is something that the new administration and Congress are going to look at. As you look ahead, what do you think the regulatory landscape might look like a year from now?
WEBER: Well, risk management of course has been a hot button issue throughout this crisis, and one of the big holes in the current regulatory landscape that needs to be addressed is ensuring that there is adequate oversight regarding potential systemic risk to financial markets. The Federal Reserve might fill that role, but when all is said and done there will certainly be a huge effort to eliminate some of the duplicitous oversight that currently exists among the banking agencies.
FIELD: Do you get the sense, Eva, that there is momentum there to have this one "Uber Agency" that some people have spoken about?
WEBER: You know there certainly is momentum, but what will eventually result is a little difficult to say, but there is certainly consensus that there needs to be a "Super Regulator" if you will that has oversight over the entire financial system so that the picture of systemic risk is a little more clear and accounted for.
FIELD: Interestingly, something someone said to me last week they said take a look at the major regulations that we pay attention to in our business, they are Graham-Leach-Bliley and Sarbanes-Oxley, and he said looking at what's happened in the last few months, who is going to emerge next year as the Sarbanes or the Oxley or the Graham-Leach of this generation of legislators? Given what you have seen in this study, legislatively do you see someone who could be the next "Sarbanes" or "Oxley?"
WEBER: Well, you know legislators across the board have been active in trying to address these issues for their constituents, but the faces that we seem to see every day include Representative Barney Frank and Senator Christopher Dodd. But we should also keep in mind that President-elect Obama has the bully pulpit, particularly while he is in his honeymoon as President, so he will have an instrumental role as well.
FIELD: Is it pretty likely we are going to see some names attached to legislation before too long?
WEBER: Certainly, yes.
FIELD: Eva, a lot of what you talk about doesn't necessarily fall right under the umbrella of an information security officer, but there are a lot of relationships there. So, my last question for you is from your study, what are the key takeaways for banking security risk management leaders who need to worry about all of the threats to a banking institution?
WEBER: Well, generally if you thought compliance was challenging before, the new world is certainly going to ratchet everything up. Bank leaders will need to ensure that their organizations have better control over data, more effective reporting, more transparency, quicker response time to regulators and an overall focus on enterprise risk management strategy. Top executives will be on the hook for more insight to what is going on in their businesses as well. Basically, if you want to know what the next five years or so will hold, just look at the mistakes that led to the situation that we are now in: Poor communication to consumers, bad assumptions about risk, questionable business practices. These are all things that need to be fixed, and now basically it will be a race between institutions trying to solve these problems before lawmakers do it and lawmakers and regulators who are anxious to prove to consumers that they are doing their job.
FIELD: It strikes me that the information security role is going to be a lot more business and banking focused now, and that that's an area that those leaders really need to I guess ratchet up their own skills.
WEBER: Absolutely. It will certainly need to be refocused.
FIELD: Well, Eva, I appreciate your time and your insight today. This is again, a fascinating new study, and we look forward to sharing it with people and seeing what unfolds in the New Year.
WEBER: My pleasure, Tom. Thank you.
FIELD: We've been talking with Eva Weber, Analyst with the Aite Group. For Information Security Media Group, I'm Tom Field. Thank you very much.