Newsmakers : Investment Banks Urged To Simplify Financial Products



Clark: Silo-based controls are at heart of problem.

In light of the record £5.6 million ($10.5 million) fine the UK’s Financial Services Authority (FSA) imposed on the UK operations of Credit Suisse’s investment bank recently, observers have warned that banks need to take regulatory penalties more seriously and not treat them “like parking fines.”

The fine was imposed on the UK operations of Credit Suisse following breaches relating to the pricing of asset-backed securities within the Structured Credit Group (SCG) of its investment banking division. The FSA stated that Credit Suisse had failed to conduct its business with due skill, care and diligence and failed to organize and control its business effectively.

The repricing of the asset-backed securities in question resulted in a $2.65 billion write-down of revenues. Commenting on the fine, Tony Clark, director of the investment banking unit at Detica, a risk management consultancy, says that banks need to smarten up their act. “Any bank tempted to view penalties for regulatory malpractice like parking tickets needs to think again,” he says. “The current regime at the FSA is clearly determined to crack down on irregular behavior, and, from now on, those found to be in breach of the rules may well start seeing themselves clamped or even towed away.”

Clark points the finger at what he calls “silo-based controls” within banks, which he says are weakened by a culture of deference toward the front office (trading desks) of investment banks. He says that banks need to take a cross-silo view of trader risk across operational silos but that the challenge for banks is to achieve this without overburdening their operations or introducing additional cost and complexity.

Clark is concerned about the increasing complexity of financial instruments being traded by investment banks and the lack of good-quality data underpinning these instruments. Part of the problem, he says, is that the management structures at the banks are becoming as complex and opaque as the products themselves. “Understanding the increasingly complex nature of the instruments being traded is one element. This in turn is compounded by organization structures characterized by matrix reporting lines that straddle product, functional and geographical silos,” he says.

Anita Hawser