L. William Seidman, former chairman of the Federal Deposit Insurance Corp., warned Monday that Wall Street may soon demand that banks turn over the results of their risk management models.
"This is the kind of information that will be required to become public," Mr. Seidman said at a conference sponsored here by the Bank Administration Institute.
Investors are curious about interest rate risk and credit risk models because they indicate how well banks predict and manage their exposures to changes in the economy. Banks whose models work well will be rewarded with higher stock prices, he predicted.
Mr. Seidman said these models finally may convince investors that bank earnings are much less volatile than in the past. This could cause Wall Street to run up undervalued bank stock prices, he said. Bank stocks currently sell at 11 times earnings, while the average New York Stock Exchange security trades at 20 times earnings, he said.
"There is no magic formula for risk management," he said. "But it is an activity where hard work will produce tremendous results."