In the wake of the subprime mortgage crisis, John Bovenzi, the chief operating officer of the Federal Deposit Insurance Corp., said regulators should pay more attention to activities occurring off a bank's balance sheet.
"Bank regulators generally focus on on-balance-sheet activities," he said in remarks prepared last week for the China International Banking Convention in Beijing. "If a bank originates a poorly underwritten loan and sells it, bank examiners have not focused on it during a bank examination because there is no expectation that it will impact the bank's performance."
Mr. Bovenzi also expressed concern about the market for asset-backed commercial paper and structured investment vehicles; he acknowledged that the final Basel II capital rules may not go far enough to protect a bank against the reputational risk it would incur for abandoning an SIV it originated.
"While Basel II assigns some amount of capital for short-term liquidity facilities that banks provide to conduits, it does not charge capital in arrangements where the bank has no such contractual obligation to provide liquidity," he said.
He also said the subprime turmoil proved that regulators need to step up consumer protection.
"More needs to be done to protect the general public against unfair and deceptive lending practices," he said.
"Many subprime borrowers entered into mortgage loan agreements they did not fully understand."