As scrutiny continues into the role that mortgage-backed
securities played in the credit crunch, data integration
specialist, Informatica, believes banks should prepare for new
legislation.
"Before the
credit crunch bit,
Basel II and more specifically the SEC's Regulation AB were the
relevant standards relating to the disclosure and reporting of risk
and asset-based securities data. With the bias of hindsight, it is
clear that these did not avert the current crisis."
Prior to 2007, mortgage-backed securities sold between financial
institutions to provide capital for further mortgages were widely
heralded by the financial services industry as a low risk method of
raising funds. This situation unraveled, however, when it emerged
that many of these supposedly high quality investment vehicles were
revealed to be comprised of low quality US sub-prime mortgages.
The economic fall-out, and subsequent high profile financial
troubles of banks on both sides of the Atlantic, may be partially
attributed to poor data visibility. Lack of information as to the
quality of individual loans in these investment vehicles would mean
it would be almost impossible to assess the risk that they
posed.
Mindful that financial crisis are typically met with reactive
legislation, Informatica, believes that new regulations will soon
be on its way, as governments intervene in the hope of averting
future problems.
Dunleavy continued, "9/11 beefed up money laundering legislation
under the USA PATRIOT Act and the Third EU AML Directive, Enron and
Worldcom's high profile collapses sparked the
Sarbanes Oxley wholesale review of corporate accounting
standards, and the Pension mis-selling scandal shone a light into
sales practices in retail financial services. It seems that that
soon the legislative spotlight will turn on the securities market.
If that is the case providers would be advised to improve standards
now."
Dunleavy believes that resulting regulation may stipulate that
financial organisations need to ensure that they have a "360
degree" view of their operations that can ensure they make balanced
risk management decisions in the post sub-prime crisis world. He
added, "Given that balanced risk management involves dealing with
vast and complex data sets, it is important that banks grasp this
nettle now and learn how to manage their information more
effectively."
It is also makes good business sense to be able to conduct
thorough Asset Readiness checks on the sell side and detailed asset
audits on the buy sides. Third-party credit ratings alone may no
longer be sufficient.
He concluded, "Integrating data across multiple sources is a
complex task, but ensuring that there is adequate, timely and most
importantly reliable explanatory data attached to mortgage-backed
securities will be crucial to rehabilitating these financial
instruments in the eyes of the marketplace. It is in the interests
of all concerned to do this before the law compels it."