Exclusive: U.S. regulators step up warnings to banks for poor risk-spotting

Thu Aug 21, 2014 1:05am EDT
 
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By Jonathan Spicer

NEW YORK (Reuters) - U.S. regulators are sending some of the biggest global banks verbal warnings as they crack down on the firms' poor grasp of their own weaknesses, and push for rapid improvements in risk assessment, according to two sources familiar with the matter.

The firms who received the warnings are among the largest banks in the world, but the sources declined to name individual firms because the enforcement actions are not public. Given the regular contact between supervisors and bank officials, the warnings could have come in meetings, phone calls, or letters.

Banks are responding to the stepped-up pressure by hiring people with experience in data governance and analytics. One of the sources said recruitment calls have spiked in the last 18 months as regulators have issued more non-public enforcement actions.

The world's largest banks have only grown bigger since the 2007-2009 financial crisis, and now contain even more separate entities involved in a dizzying web of credit obligations and trading positions. Banks, hobbled by what regulators believe is poor risk-management data, are struggling to get a handle on the full scope of their trading activities and asset quality.

The result is that six years after the financial crisis, regulators and the industry they oversee cannot confidently assess big-picture threats to the U.S. financial system.

And what was once viewed as an issue for data geeks has now been elevated to a safety-and-soundness concern that could eventually lead to restrictions on bonuses, dividends and share repurchases.

"The information that external investors and supervisors have about these firms is essentially hostage to the quality of the data management within these firms," said Lewis Alexander, who between 2010-2011 helped lead the U.S. Treasury's effort to set up the Office of Financial Research, or OFR.

Alexander is now U.S. chief economist at Nomura and also chairs the OFR's advisory committee.   Continued...

 
The U.S. Treasury building is seen in Washington, September 29, 2008.   REUTERS/Jim Bourg