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Some say we should have seen the 2008-2009 recession coming from miles away. Multiple sources cite the events below as symptoms of what many consider to be the worst economy since the Great Depression:
Though the specific facets of recovery and reform remain unclear, IT leaders within the financial services industry are wise to predict and prepare for a time of healing and change.
Now that the nation is moving toward a new tomorrow, what can we expect the future to hold? While we lack a crystal ball to identify certain outcomes, several well-informed hypotheses exist about what tomorrow brings for the financial services industry. Congress will pass legislation. New mandates will address risk management policies and improve financial transparency. Compliance will be mandatory; reporting will be in real time; and regulatory oversight will be stringent. Though the specific facets of recovery and reform remain unclear, IT leaders within this vertical are wise to predict and prepare for a time of healing and change.
Following the catastrophic decline of the U.S. housing market, the bankruptcy of several leading financial institutions, and the resulting economic recession, the nation contemplated two key questions to ensure we never again experience a crisis of this kind and magnitude: What happened? And how did we get here?
Experts attribute the economic recession to a variety of causes, ranging from weak government regulation to corporate greed and consumer exploitation.1 Some specific factors include but are not limited to:
A collective examination of these contributing factors not only provides insight to what went wrong but also serves as an impetus to change.
On June 17, 2009 the Obama administration proposed a “sweeping overhaul of the financial regulatory system.” The specifics, timeline and extent of new legislation are still uncertain, though not entirely unforeseen. The White House communicated five specific goals for reform:
As a result of these goals, financial organizations can expect some or all of the following changes to take place in the future:
Creation of Consumer Financial Protection Agency (CFPA): On June 7, 2009, the White House proposed this new regulatory agency to thoroughly vet financial products and regulate consumer risk. The CFPA is chartered with holding financial institutions accountable to being well-versed in the products they offer so consumers can make more informed decisions.
Increased Compliance and Risk Management: New regulations will heavily scrutinize all facets of financial services operations. As a result, financial service providers, specifically less-regulated providers such as hedge funds and private equity firms, will most likely need to invest more in their compliance and risk management efforts. In fact, in a Jan. 21, 2010 White House press release, the Obama administration called for a scope restriction on banks and financial institutions to “ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.” According to the release, “the proposals would help put an end to the risky practices that contributed significantly to the financial crisis.”
Increased Transparency: The Federal Reserve Board will likely require risk oversight of some financial institutions, especially those large institutions that are deemed “too big to fail.”2 These organizations will require real-time reporting capabilities to manage and report on risk.
Transition from GAAP to adoption of IFRS: Generally Accepted Accounting Principles (GAAP) refers to the standard guidelines for any financial accounting used in the U.S. The issue facing financial institutions and any other U.S. company is that the global financial crisis has put more pressure on them to adopt the International Financial Reporting Standards (IFRS). The increase in regulation and the globalization of the world economy is going to make it difficult, if not impossible, for U.S. companies to operate on only the GAAP standard. So, while the transition to IFRS would hopefully streamline some of the processes, there is still a debate regarding whether or not the U.S. should keep the GAAP standard or add the IFRS as another layer of reporting.
To ensure proper preparation for the uncertain impact of revised regulations, experts recommend that IT leaders of financial institutions take the following steps:
When evaluating technology solutions, make sure to consider compatibility of global compliance efforts.
Only time will tell how revised federal regulations of financial services will impact the industry’s future. Despite the economic trauma of the past and looming uncertainties ahead, it is critical to properly prepare for the impact of revised government regulations. A strategic partnership with IT providers will allow your organization to leverage the technical support needed to secure your future bottom line.
1 “U.S. Regulatory Regime in Flux”, Gartner, Inc., June 19, 2009
2 “U.S. Financial System Regulatory Overhaul Brings More Scrutiny”, Gartner, Inc., June 19, 2009