|
April 23, 2008 - Roger Cole, director of the Federal Reserve Board’s (Fed) Division of Banking Supervision and Regulation, addressed Women in Housing & Finance (WHF) on April 22 about the Basel II rules and lessons learned from the recent market turmoil. NASCUS was present for the briefing.
Cole’s presentation focused on banking supervision and regulation but he also discussed the Fed’s management of the market turmoil and the role of risk identification and modification in addressing the crisis.
Identifying risks and modifying business decisions to adjust to risks was key to surviving the market turmoil, Cole said. Additionally, he emphasized that understanding the operational risks of mortgage lending was important.
Cole also discussed how liquidity risk became problematic and that some institutions had problems quantifying risk or they used the wrong models that could not capture all the risks.
Models are only as good as the assumptions they are built around and the data presented in them, warned Cole. He said that models are useful, but it is important to understand how they operate. Some institutions left out key variables, such as income for mortgage originations.
Valuation practices are important, as well, said Cole. Sound judgment and proper scrutiny are essential in this market. Cole explained that some firms had sound market liquidity practices that accurately reflected market conditions. Others did not plan for management and reputation risk. The end goal needed to include all business lines in internal controls; silos could not exist in the risk management structure. Stress tests were also important to show individual events.
Further, Cole addressed governance and controls, stating that solid governance is vital to the health of a financial institution. He explained that senior management cannot take a “detached role” and that management must be active and involved; he stressed that “governance and control structure is set at the top.” He also encouraged management to reinforce supervisory guidance and refine and augment it, when needed.
Cole also stated he thinks that Basel II will help institutions with the onset of future turbulence. To read more about WHF, click here.
|
