Banks should prepare for post-sub-prime legislation

As scrutiny continues into the role that mortgage-backed securities played in the credit crunch, data integration specialist, Informatica, believes banks...

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."

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