Ten years after the financial crash that led to the Great Recession, experts still don’t agree on which factors were most important in causing it, and consequently what should be done to prevent a repetition.
Rick A. Fleming, the investor advocate at the SEC, summarised the impact of the crisis: “About four million families had lost their homes to foreclosure and another four and a half million had slipped into the foreclosure process or were seriously behind on their mortgage payments. Nearly $11tn in household wealth had vanished, with retirement accounts and life savings swept away. Millions of Americans had lost their jobs, with unemployment peaking at about 10 percent in October 2009 and staying above 8 percent for three years. Stock values plunged, too, with the S&P 500 shedding 55 percent of its value between October 2007 and March 2009."
In response, Congress adopted the 800-page Dodd-Frank Act (DFA) in the summer of 2010, although by February of this year only about 72 percent of its rules had been written, while the law had drawn persistent opposition from the finance industry in multiple agency hearings and lawsuits.
To this day, Republicans are promising to modify it or get rid of it altogether, even though most experts think a complete repeal is unlikely.
The comment attributed to Otto von Bismarck: "Laws are like sausages, it is better not to see them being made”, appears to apply equally to legislative revisions. It seems that, even after seven years of discussion and debate, the process, and attendant uncertainty, could go on for quite a while longer.
Explaining the outcome of the Dodd-Frank Act
What the Dodd-Frank Act’s history tells us is this continued uncertainty will be seized upon as a real business opportunity by some banks. Rather than complain about all the new regulations, we think smarter; empathic financial firms will identify the essential qualities that customers have come to expect and continue to provide that level of integrity and service whether the law continues to require it or not.
For proof of this hypothesis, one needs only to look at some of the larger US banks who have continued to moderate the requirement for significant changes to Dodd-Frank in large part due to their recognition that Dodd-Frank has been particularly successful in reducing systemic risk.
We asked the President and CEO of KoreCon X, Oscar A Jofre, what he thought about the strengthening of financial institutions and the positive impact of DFA,
“Dodd-Frank act has been very positive to instill confidence in the marketplace. The markets were operating with no set guidelines and Billions of dollars were lost. Like any regulation can you either embrace it in a positive or negative manner. For many good financial institutions and the industry at large, this has provided a great framework that can be shared with customers to rebuild trust.”
As a direct result of this risk reduction, the competitiveness of the largest US banks both at home and around the world has never been stronger. The post-crisis regulations, or more accurately the ability of larger banks to comply with the requirements of the law, have provided them with capital and capabilities that have provided a significant competitive advantage over their global peers and smaller US banks.
The challenge to the smaller and mid-sized US banks being more accepting of the benefits of Dodd-Frank has been the costs associated with compliance. The big banks, who can afford large compliance teams have understandably been more welcoming of the critical provisions of the DFA, while there was no doubt they put an enormous financial strain on small, to mid-size banks just to comply.
However, with the advent of new technology platforms, the costs associated with DFA compliance will continue to trend down for all sizes of bank, so even the cost of compliance as a barrier is likely to be removed in the very near future. At this point, we believe that whether Dodd-Frank stays or goes will become a moot point. All banks will either have the means or the tools to be compliant and it’s at this point all banks will potentially stand to profit from the positive business impact the DFA can make.
Role for technology
One of the causes of the crash was the lack of transparency in asset-backed securities portfolios. At that time, investors had to rely on ratings supplied by the credit rating agencies who were paid by the issuers.
Furthermore, while that potential conflict of interest hasn’t been solved by Dodd-Frank — the agencies are still paid by the issuers – there now exist technologies, like the Pendo Platform, that enable banks to thoroughly review and verify their exact holdings by examining both their structured and unstructured data to confirm their true market value with an extraordinary degree of accuracy.
These technologies can do this quickly, accurately and repeatedly, and with an audited confidence rating above 95% means all sizes of bank will soon begin to benefit from a level of data transparency that simply wasn’t possible before such platforms being available.
There’s another way in which the advent of new technology platforms has transformed the pre-Dodd-Frank landscape. Back then, it wasn’t that institutions didn’t want to provide the level of transparency such platforms now enable, it was simply that they lacked the tools, the time, or the funds for such an undertaking to succeed.
Viewing and measuring
Let’s use as an example, a loan lineage project. To verify the lineage of a loan portfolio from system of origination through to the current system of record could involve millions of documents, most of which will be unstructured. Absent access to a technology platform like Pendo’s would mean even a large bank would be looking at a multi-year project with an army of consultants to go through the entire portfolio manually.
Pendo, however, working with a major American money center bank was able to complete a loan lineage project involving 48 million documents in just eight weeks. With that project alone they saved their customer almost four years in time, and more than $3.5m in cost.
Turning structured data into information has become something of a cliche in finance, but it is no longer enough. Banks that have used new technologies to truly interrogate their unstructured, or dark data understand know it can have a significant impact on their balance sheet and regulatory standing.
Now that technology is starting to enable banks to turn their dark data transparent, it’s possible that the smarter banks will proudly announce their use of such technologies that create enterprise-wide proof of value. In a similar way, ‘Intel Inside” re-assured PC buyers that the equipment they were considering was a good choice.
In Conclusion new technologies and the level of transparency and accuracy they offer banks, no matter their size, is the reason we believe the Dodd-Frank Act will leave a positive legacy no matter what happens to it in the future. Simply put, the smarter institutions have already realised that being able to hyper-accurately quantify their precise exposure and the value of their holdings to use internally and to communicate to third parties such as ratings agencies, regulators, counterparties and potential M&A actors turns out to be good for small business and entrepreneurs.