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S. Balakrishnan

Heard of a bank CEO who wants more regulation?

Well, there’s actually one. He’s John Mack of Morgan Stanley, one of the world’s largest investment banks.

A Bloomberg report quotes Mack: “We have probably 15 to 20 Fed regulators in our building 24 hours a day. They test our models. They question everything we do. I’ve never been regulated like that before. It’s a different environment. Someone said to me, ‘What do you think of it?’ I love it.”

The average bank CEO thinks trading in financial markets is a big rainmaker. But, Nassim Taleb, in his books, Fooled by Randomness and The Black Swan, says rainmakers could turn disaster makers overnight if extreme events overtake markets, as they have, increasingly, in recent times. The biggest risk is the ‘unknown unknown’ not the ‘unknown known’ or ‘known unknown’ to use former US Defense Secretary Donald Rumsfeld’s phrases in a different context.

Internal oversight does pinpoint market exposures which are excessive and could cause large losses, even institution-destructing, if things go wrong. Yet, in the desperate search for profits and bonuses, they are brushed aside. Often, the whole paraphernalia of risk management, headed by the grandly-titled chief risk officer, is more to comply with central banks’ requirements than anything that bank managements seriously believe in.

Besides, there’s peer and top management pressure on risk managers not to stand in the way of opportunities to make profits. Few can withstand it. After all, if the Cassandras are heeded and turn out to be wrong, they would look foolish and be blamed. So ran an account in The Economist magazine of the risk chief of a major international bank.

To go back to Mack, why would he want more instead of less regulation? He’s forthright and remarks, “we cannot control ourselves. You have to step in and control the Street.”

It must be rated a confession of historic proportions of the state of affairs in the world’s largest financial institutions, in fact, those considered ‘systemically important’, in the Obama administration’s new regulatory policy framework.

Mack makes it obvious he has more faith in regulators detecting risk overflow. He practically wants the Fed to be the bank’s risk manager (and that of the banking system).

After the crisis, the possibility of a rogue trader bringing a bank to its knees suddenly, without the least hint, is the heightened persistent nightmare of every CEO.

Mack seems to believe there’s no harm but a lot of good done if regulators add an independent and possibly a more effective layer of oversight in banks.

More Stories on : Financial Markets | Regulatory Bodies & Rulings | Financial Scan

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