"Countless financial institutions have told us for years that the industry is too fluid, too competitive or too complex for good quality, current information on risks and controls to be provided to senior management," said Richard Pike, CCH SWORD director. "The outcome of this thinking has had negative impact on economies, businesses and individual citizens worldwide."
Pike notes that a number of other industries are complex, competitive and fluid, yet have established and enforced stable core products and processes, including pharmaceuticals, aircraft manufacturing and nuclear power generation organizations.
"Within these industries, every company must be able to prove to regulators that each and every core process and product has gone through rigorous reviews and each control is of the highest quality," said Pike. "Financial institutions are as vitally important as these industries, and we need to ensure they are regulated as such."
As an example, under a more stringent framework, Pike points out that any proposed adjustable rate mortgage product would be forced to go through a rigorous review process where all impacted stakeholders, including clients, back-office staff, risk staff, senior management and regulators, would be consulted and lengthy testing cycles completed.
Additionally, financial institutions must be more disciplined in understanding their risk models and ensuring that all of the processes upon which risk models rely are "locked down" and subject to very rigid change control procedures. For example, a chemical engineer would not change an input to a process without fully understanding the ramifications and effects that may occur many years into the future.
Returning to the adjustable rate mortgage example, Pike notes that many credit risk systems capture all the actual mortgages issued, however, the process of recording borrowers details (upon which the probability of default was calculated) has been shown to be faulty and not subject to the correct controls.
While the locking down or stabilization of these processes and controls may lead to a less flexible customer experience or limited choices, Pike is quick to point out the alternative.
"The current economic downturn is showing people that 'easy credit' is not necessarily good for their long-term financial well-being," he said. "Regulation of the financial industry in such a way as to lock down the processes and products that drive risk and then to enforce high quality scenario analysis will make financial institutions a more reliable leader in the global economy. And that is to the benefit of us all."