The Office of the Comptroller of the Currency's risk management supervisor is urging banks to sharpen their oversight when bringing asset- backed securities to market.
Examiners are spotting errors in data about the securities' structure and their expected performance, said Michael L. Brosnan, deputy comptroller for risk management.
Some banks are also rushing their deals to market, making mistakes all the more likely, and, like other securitized-asset issuers, offering too little information to guide investors, Mr. Brosnan said.
The criticisms, voiced at an industry conference on risk management, come as securitizations, not certificates of deposit, supply an increasing share of banks' funding.
"Those who live by the rollover will die by the rollover," Mr. Brosnan said, referring to the rapid transformation of assets into securities packages. "We're seeing much more activity through Wall Street" by larger banks.
The Comptroller's Office generally favors securitization, which "adds quite a bit of flexibility for banks and their ability to redistribute wealth into the financial marketplace," Mr. Brosnan said.
But problems are cropping up, he told bankers Tuesday in Orlando at the credit risk and treasury management conference sponsored by the Bank Administration Institute.
Mr. Brosnan declined to cite cases in which mistakes had been found in securitization documents, but he did say the errors involved the misclassification of certain data used to market the products.
Though no loan packages have imploded yet, he urged bankers to slow down to avoid mistakes. Deals are coming to market within 30 days when issuers, especially new ones, should allow about three times that long to ensure accuracy, he said.
Mr. Brosnan said banks should be in the forefront of a growing drive to include more information in offering documents for securitized assets.
He said investors need more information to gauge performance, such as more comprehensive payment assumptions. He also said offering documents should include projections about how the securities may perform under different economic conditions.
The additional information would be welcome, said Nancy Stroker, executive vice president at Fitch IBCA, which rates asset-backed securities.
"Industrywide that is the request we hear often from investors," Ms. Stroker said.
Appearing with Mr. Brosnan on the panel, a top regulator from the Federal Reserve System reiterated the agency's stance on trading and other securities activities at banks.
"The increased speed and complexity and the global nature of financial markets has added new dimensions to systematic risk," said James V. Houpt, deputy associate director with the Federal Reserve.
New systems must be matched by new safeguards to make sure activities do not go awry, Mr. Houpt said.
"Institutions began using all the new technologies to construct and transact complex deals, but they then had to strengthen their management practices to maintain control," Mr. Houpt said.
A separate risk management unit, "independent of the trading function," should be maintained and report to top management in the institution, Mr. Houpt said.
Missteps will be costly, he said. "The consequences can be severe as markets and the regulatory process take their toll."
