14 Jul 2011
On the eve of bank stress tests by the EBA, Clive Stainton, Head of Risk at Rule Financial, says that the FSA has been caught napping and that the banks are unsure what is required of them. Are we in a situation of analysis paralysis?
The European Banking Authority (EBA) is a day away from announcing the results of the latest round of stress tests and the rumour mill has gone into overdrive about the possible outcome and the credibility of such tests. While the process has been refined and is much better than what it was previously, it is expected that a significant proportion of banks in the European Union subject to the latest tests will fail against the new criteria.
Inevitably, a number of these banks will be headquartered in the UK. However, it can't come as much of a surprise when our own regulatory body, the FSA, is behind the curve in dealing with these issues. The FSA is unable to undertake everything being required of it, let alone focus on the detail, due to limited resources. Simply put, it just doesn't have the manpower or systems in place to deal with the huge task at hand.
As a result, the regulator is in a situation where because of limited resources, asking the correct questions in the first place is difficult enough without then having to capture the large volumes of data that is submitted by the banks and then processing it. Add to that the increasing attrition and turnover of staff within an organisation like the FSA - whereby the person receiving the information from the bank is not the same person who asked the question and put the bank on the spot in the first place - then the problem is compounded.
The issue of resourcing, especially the latter scenario, can often lead to miscommunication and the key to helping banks meet stress testing requirements is establishing better lines of communication. Over time, the banks and regulators will get used to the process but right now they are like two ships passing in the night.
The banks do not fully understand what exact information the regulators want from them and with so much raw data, are instead providing averages of averages to produce a figure that they think the regulator is looking for. It would seem obvious that as soon as a bank receives a question from a regulator and it is unsure of what information to provide that it would ask for clarification - and this is exactly what we advise our clients to do; to not hang about but to be upfront and fire questions back straight away to get that clarification - but the prospect of having everything they say or do being publicly disclosed compels them to do the best they can with what they have. This creates a scenario of analysis paralysis, whereby there is lots of data but little valuable information.
The fact is that banks and regulators need to have an open and honest relationship in which they can be frank with one another. If the UK regulators were to work individually with each bank keeping disclosure in confidence, these institutions would be more willing and able to share all their issues - not they have anything to hide but to enable them to fine-tune their answer.
In turn, regulators could advise the best solutions to make them compliant and the risk of over-analysing spurious accuracy would be kept to a minimum. Only this way can regulators focus their efforts where most needed, and the shareholder and tax payer be best served.
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This blog first appeared on Financial-i. Click here to see the entry on the Financial-i website
