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For Bank Risk Manager, Two Wrongs Make a Mess

Editor's note: A version of this post originally appeared on LinkedIn.

I shared a meal in Midtown Manhattan last week with an old friend who's worked in the risk management department of the same super-sized bank since before the bust. My friend is a straight shooter who years ago railed against the foibles of his own institution. As the crisis hit, he was merciless in fingering fellow bankers he’d observed close up.

When Washington responded by cooking up the Dodd-Frank Act, he waxed cynical about its prospects. (Me too, in a column in which I called it “regulatory overkill.”) How, he asked, did Washington possibly think it could slow the activities of giant banks and their armies of people whose job it was to circumvent regulations?

My friend’s tune has changed markedly since then. During our recent meal, he held his hands shoulder-width apart to illustrate the former size of his bank's prop-trading operations. Then, with his thumb and index finger, he made a small circle to show what it’s shrunken to under the Volcker Rule's prohibition on speculative trading.

“What happened to all those traders?” I ask.

“They’re gone,” he said with a wave of his hand. “Some retired. Some went to hedge funds. Others are unemployed or went back to school.”

What’s grown in their place, he continues, is an army of risk managers and compliance functionaries charged with compiling countless pages of regulatory documents. Handing a recent Wharton grad a small fortune to take a flier on the Indonesian rupiah is no longer an option. Among a gazillion other requirements, big banks must now show that all trading involves some sort of client order or risk hedge.

One absurdity in all this, my friend says, is that speculative trading is not what brought down giant banks. Instead, he pins the blame on imprudent mortgage lending and its many offshoots, with the government’s active encouragement.

"It would have made a lot more sense to bring back Glass-Steagall," he argues, referring to the law that for much of the twentieth century kept commercial lenders and investment banks separate.

The problem with such an elegant solution, I counter, is that it would short circuit one of Washington’s favorite pastimes: Making work for and increasing the power of Washington. No argument there from my friend.

Instead he noted that his own bank, and its mega-brethren, have themselves become bloated and bureaucratic in the wake of their crisis-era shotgun marriages.

“If you made these banks 20% more efficient, you’d unlock a huge amount of wealth,” he tells me.

Another thing that sticks in his craw: The way bankers and banking have been demonized while bureaucrats and bureaucracies have gotten off lightly. While Dodd-Frank has taken a meat cleaver to banks, the spaghetti pile of banking regulators has been left virtually untouched.

To my friend, the result makes a mockery of prudent risk management. Collateralized debt obligations, he notes, are still overseen by the Securities and Exchange Commission, while many related products fall under the purview of the Commodity Futures Trading Commission. (Legislation aimed at merging the two agencies got nowhere in a town where reform is seen as something to impose on other people.)

I conceded the point but add that it would seem the greater goals of so-called financial reform have been achieved. Banking, after all, is becoming a more boring and less profitable industry. On that point, my friend and I are in full agreement.

Neil Weinberg is the editor-in-chief of American Banker. The views expressed are his own.



(5) Comments



Comments (5)
For you who want a good regulatory regime (I want none at all), here's a simple one: require all bank executives above a certain level to keep 90% of their net worth, excluding their primary residence, in common and preferred stock of their employer. Then you won't need all the micromanaging regulations and can help increase the unemployment rate in Washington, DC.
Posted by Bob Newton | Monday, March 03 2014 at 4:41PM ET
In a similar vein to Mike, until we begin to see federal financial regulators who will vigorously-enforce regulations on banks during times of relative calm, we will undoubtedly see the same regulators who will vigorously advocate capitulating to the banks in times of trouble.
Posted by jim_wells | Monday, March 03 2014 at 2:14PM ET
Until we begin to see more regulators who have been bankers and more bankers who have held regulatory roles, we will always see the pendulum of over-correction and under-correction in banking policy and practices.
Posted by Mike Clement | Monday, March 03 2014 at 1:45PM ET
But, bankers are evil capitalists and Democrat politicians are selfless public servants who only want the best for humanity...
Posted by Bob Newton | Monday, March 03 2014 at 1:32PM ET
Absolutely!!! Legal construct and bank organizational mechanics were already 'tried & true.' Banking and non-banking units were easily-identifiable. Rare that 're-inventing the wheel' is the 'best' course of action. Now, going on 6 years after the Financial Crisis, government-insured mega-banks are still acting like casinos.
Posted by jim_wells | Monday, March 03 2014 at 1:32PM ET
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