Geithner Issues a Call to Action

U.S. Treasury Secretary Timothy Geithner delivered a speech this week at New York University's Stern Business School to kick-off the massive effort to craft new financial regulations to comply with the Dodd-Frank Act of 2010.  In his speech, he promised to streamline and simply the rules while working to codify them at an expeditious pace.  He also provided the following call to action for the financial services industry.

For the financial industry, your core challenge is to restore the trust and confidence of the American people and your customers and investors around the world. You will have to make your own decisions about how best to do that, but, I thought, given that I'm here in New York, I'd offer a few suggestions as an interested observer.

Don't wait for Washington to draft every rule before you start changing how you do business. Get ahead of the process and out in front of your competitors. Find new ways to improve disclosure for your consumers.  End hidden fees. Don't push people into loans they can't afford.

Demonstrate to your business customers – small and large – that after running for cover during the peak of the crisis you are ready and willing to take a chance on them again. Change how you pay your executives so you are not rewarding them for taking risks that could threaten the stability of the financial system.

Make sure you have board members who understand your business and the risks you are taking. And, focus on improving your financial position so that your financial ratings, your cost of capital, the amount you have to pay to borrow, all reflect your own financial strength and earnings prospects, not the false expectation that the government will be there in the future to rescue you.

You can do all of that right now, even before the first new rule of financial reform is written.

Secretary Geithner is right to encourage banks to move now in the right direction as opposed to waiting for the rules to be written.  Doing so will not only better prepare the companies for the change to come, but will also provide a significant competitive advantage that will surely result in a similar increase in shareholder value.

Standard & Poor's Emphasizes ERM Importance

Since September 2008 when this blog was launched, Standard & Poor's has been evaluating enterprise risk management ("ERM") practices at both financial and non-financial companies as part of their credit rating evaluation process. Recently, Standard & Poor's issued a white paper discussing the importance of ERM and clarifying its review process of non-financial companies.  The white paper also contains a list of Frequently Asked Questions that provides a better understanding of the nature and scope of the reviews.  Here is their view of the importance of ERM today.

Managing enterprise-wide risks and capitalizing on opportunities are fundamental responsibilities of senior executives at all firms. Standard & Poor's Ratings Services' corporate credit ratings include evaluations of those managers' strategies, effectiveness, and credibility. These evaluations help us develop forward-looking opinions on credit strength by supplementing our fundamental analysis of the company's business and financial risk profile. Beginning in September 2008, we widened the scope of our analysis of some non-financial companies' management to enhance our review of managers' ability to identify, monitor, and manage key risks -- those endemic to its industry and those that managers elect to take when running their businesses. Specifically, we started to look at how a firm's culture (communications, structures, incentives, and risk appetite) affects the quality of its decisions and at the role risk considerations play when making strategic decisions. The public spotlight on risk management has intensified since we began this initiative.

1. The U.S. Securities and Exchange Commission (SEC) now requires that proxy statements that public companies file include disclosure of risk-based compensation policies, the role of the board of directors in risk oversight, and the nature of communications between executives and the board on risk issues.


2. The National Association of Corporate Directors' Blue Ribbon Report on Risk Governance urges boards to assess risk in strategy, closely monitor risks in culture and incentives, and consider emerging risks to the firm's business.


3. The International Organization for Standardization's ISO 31000 family of risk management standards define a common global approach to risk management.

Greater public scrutiny follows the extended global recession and accompanying wave of corporate defaults -- grim reminders of the consequences of unpreparedness and weak risk management.

Given the increased importance and added scrutiny, ERM is a certainly critical success factor for all companies today. If you are interested in how your ERM program measures up, Wheelhouse Advisors can provide a quick, complimentary diagnostic review.  To learn more, email us at NavigateSuccessfully@WheelhouseAdvisors.com.

The Time for ERM is Now

The Dodd Frank Act of 2010 that was recently signed into law by President Obama will require not only banks but also nonbank financial companies to have a formal risk committee and enterprise wide risk management program. Specifically, the Act has a mandatory provision for public companies with total assets greater than $10 billion to have these risk management practices in place and an option for the Federal Reserve to require public companies with fewer assets to have the same.  Here is an excerpt directly from the new law pertaining to the new risk committee requirement.

RISK COMMITTEE.—A risk committee required by this subsection shall—

(A) be responsible for the oversight of the enterprise wide risk management practices of the nonbank financial company supervised by the Board of Governors or bank holding company described in subsection (a), as applicable;

(B) include such number of independent directors as the Board of Governors may determine appropriate, based on the nature of operations, size of assets, and other appropriate criteria related to the nonbank financial company supervised by the Board of Governors or a bank holding company described in subsection (a), as applicable; and

(C) include at least 1 risk management expert having experience in identifying, assessing, and managing risk exposures of large, complex firms.

These requirements will become effective in one year, so the time is now to begin working on your enterprise risk management practices.  Wheelhouse Advisors is uniquely qualified to help companies establish a practical, business-focused risk management program that is cost-effective.  Visit www.WheelhouseAdvisors.com to learn more.

New Basel Capital Accord Announced

Yesterday, the Bank for International Settlements announced that its Basel Committee on Bank Supervision has reached a preliminary agreement on a new capital accord widely known as Basel 3. Here is what the New York Times reported today.

Central bankers and regulators have reached an almost-unanimous preliminary agreement on new standards to reinforce the stability of the global financial system, adding to investor confidence in the outlook for many banks.

In the next few months, the regulators will conduct a detailed analysis of how the standards would affect the biggest banks in Europe, Asia and the United States. Under the plan, banks will have until as early as 2018 to comply with a requirement that they hold at least $3 in capital for every $100 they lend — a so-called leverage ratio of 3 percent. A leverage ratio is considered the broadest measure of a bank’s financial strength.

The regulators said the final amount might be adjusted. Whatever the amount, the requirement should have little effect on U.S. institutions, which already meet the 3 percent standard easily. Some European and Asian banks could have to reinforce their financial positions.

Like many movie sequels, this new capital accord is somewhat anticlimactic. An implementation period of seven years is the length of many business cycles and we will certainly see a need for adjustments to the capital accord by then. So, stay tuned for Basel 4.

Prepare Now for the Tsunami of New Rules

Nearly two years after the worst of the financial crisis of 2008, financial regulatory reform legislation has been signed into law by President Obama. The Dodd-Frank Act of 2010 officially became law yesterday in a signing ceremony at the Ronald Reagan Building in Washington, DC.  Weighing in at over 2,000 pages, the new Act is chock full of mind numbing details.  However, the most important details are still yet to come. The Act provides authority for regulatory bodies such as the Federal Reserve to create new rules for financial institutions to follow. This will serve to significantly increase the compliance risk for these companies.  Here is what the Wall Street Journal reported yesterday.

The legislation is a major revamp of U.S. financial-market oversight, streamlining regulation and giving agencies such as the Fed much broader authority to deal with the most complex financial institutions. Many of the new rules will depend on regulators to write specific restrictions and regulations, and Bernanke said the onus is on officials to ensure that they are “sufficiently tough that the risk of another crisis is very low.”

Financial services companies should brace themselves for an onslaught of new rules and also should ensure they have the appropriate infrastructure to respond in a quick and efficient way. Much like the formation of a tsunami, the Act is essentially the earthquake preceding the gigantic wave.

Increasing Demand for Strong ERM Solutions

A new survey by IDC Financial Insights confirms that demand for Enterprise Risk Management ("ERM") solutions is increasing as the new regulatory environment becomes more certain in the wake of the financial crisis. This is not a surprising result to readers of this blog, but one that will become even more apparent as we enter the latter half of 2010 and into 2011.  Here is an excerpt from the survey as reported by American Banker and Bank Technology News.

The microscope that’s fixed on enterprise risk management is getting more powerful, from both internal and external sources, says IDC Financial Insights. In its 2010 survey of senior risk managers at Tier One and Tier Two U.S. banks, the research firm found that both top management and regulatory agencies are paying more attention, and that delinquency and other customer credit risks linked to the banking crisis are still front and center.

Key findings from this study include the following:

• Enterprise risk management is now getting more attention from internal (boards) and external (regulators) parties than ever before.


• The overall economy still has question marks, which is increasing the pressure on consumers and commercial customers to make payments – stress on delinquency is still front and center.


• With the focus on speed, accuracy, and efficiency, cloud or hosted risk management solutions are gaining more and more consideration by financial institutions. When asked about whether the institution is looking to replace in-house solutions with hosted solutions over the next 12 months, 25% of respondents gave a positive answer.


• According to the survey results, 58% of respondents are concerned about increased levels of systemic risks over the next 12 months.

Well constructed ERM programs are the best antidote to the increasing pressure from key stakeholders such as regulators and boards. For help in determining the necessary steps to construct your program, visit www.WheelhouseAdvisors.com.

More Change is on the Way

More change regarding how U.S. public companies disclose details about their risk management programs is on the way. The Wall Street Journal recently reported that the Securities and Exchange Commission is re-evaluating disclosure requirements on the heels of financial regulatory reform. Here is what they had to say.

The Securities and Exchange Commission will act quickly to revise corporate risk disclosure requirements and also consider more sweeping recommendations on executive compensation disclosures and easy-to-read corporate filings, SEC Chairman Mary Schapiro said Friday. The SEC also is looking at trading activities such as hedging, shorting, arbitrage and certain types of market orders, to ensure that all investors have access to a highly complex and technologically sophisticated trading market, Ms. Schapiro said in the text of prepared remarks.

SEC staffers now are re-evaluating all corporate filing forms and disclosure requirements, asking whether the information that is being sought is "still relevant," Ms. Schapiro said. "After this review, I expect the staff will present individual recommendations that we can act on quickly, such as revising the risk disclosure requirements," Ms. Schapiro said in the text of her speech to the Society of Corporate Secretaries and Governance Professionals.

Companies should be prepared to provide more substantive information regarding their risk programs. Wheelhouse Advisors can help your company with a complimentary risk program diagnostic review. For more information, email us at NavigateSuccessfully@WheelhouseAdvisors.com.