2 + 2 to equal 4 -g-
The committee concluded after interviewing bank executives, among others, that complex debt products were at the "heart" of the credit market's woes. Central to these problems was that products such as collateralized debt obligations -- pools of debt repackaged into pieces with differing levels of risk and return -- were so complex, so opaque and so badly explained that no one, let alone investors, truly understood their risks, the report concluded.
U.K. Panel Warns of Tighter
Banking Regulation
By ALISTAIR MACDONALD
March 3, 2008; Page A2
LONDON -- An influential British parliamentary committee has told investment banks to demystify the complex financial products they sell or risk increased regulation here in London, a financial center that has prided itself on its light-touch oversight of banks.
The warning comes as policy makers world-wide sift through the wreckage of the global credit crunch and ask what more regulators could have done to lessen its impact. On Thursday, U.S. Federal Reserve Chairman Ben Bernanke faced questions from the U.S. Senate Banking Committee about how well the Fed and other American regulators supervised banks.
Politicians throughout the world, meanwhile, have called for a more global approach to regulation.
The Treasury Select Committee's report on Stability and Transparency, to be released today, said Britain's banking supervisors -- the Bank of England and the Financial Services Authority -- need to do more to convey the risks of potential problems in financial markets. While the committee doesn't have the power to change regulations, its mandate is to scrutinize government policy and to influence changes.
The committee concluded after interviewing bank executives, among others, that complex debt products were at the "heart" of the credit market's woes. Central to these problems was that products such as collateralized debt obligations -- pools of debt repackaged into pieces with differing levels of risk and return -- were so complex, so opaque and so badly explained that no one, let alone investors, truly understood their risks, the report concluded.
If banks aren't doing a better job of explaining such risks within six months to a year, "then regulation would be the only way to sort it out," said John McFall, the member of Parliament who led the inquiry, in an interview.
Mr. McFall said that one bank executive, in his testimony to the committee, said that he wasn't an "expert" in products such as CDOs, a statement Mr. McFall views as emblematic of what went wrong. "If you have an executive of a big bank not understanding what a CDO is, what chance has an ordinary" person, Mr. McFall said.
Britain has long argued a nonintrusive approach to financial regulation has been a key to London's success as a financial center.
Early last year, through such means as their annual financial-stability reports, the Bank of England and the FSA had outlined the type of risks a credit crunch could pose for financial markets. But the banks didn't heed their warnings, the committee concluded.
The parliamentary report recommends that, in future, the Bank of England and the FSA highlight the two or three most important risks in a short letter to financial institutions. The Bank of England and FSA also should seek confirmation from those institutions that their warnings have been properly considered and report to the public on the responses, it said.
The panel also faulted credit-rating companies for failing to spot and explain the risks, and investors for poor research.
Write to Alistair MacDonald at alistair.macdonald@wsj.com |
