risks & resolutions: the “day after” for financial institutions april 15, 2009 lessons...

RISKS & RESOLUTIONS: THE “DAY AFTER” FOR FINANCIAL INSTITUTIONS

APRIL 15, 2009

Lessons Learned1

Key Points

Financial system developments and leverageOriginate to distribute business modelInterconnections in the financial systemRole of the unregulated or “shadow” banking

systemIncentives

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Originate-to-Distribute Model

Market largely shut downKey lessons learned:

Underwriting matters Does the market understand what it is buying Transparency, disclosure

Complexity or simplicity?Sustainable business model?

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Interconnections

Complexity of financial systemTransformation of risksLessons learned:

Need to look in more than one place for risks Stress testing and scenario analysis – what if? Correlations Left hand and right hand are in sync

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Role of unregulated financial system

Nonbank world – how much of a driver are they?

Lessons learned: General consistency in practices very important Risks can build up in places you don’t expect “Save us from ourselves”

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Incentives

What drives risk taking?What drives risk management?Critical to understanding incentives

Bank and nonbank sector practices What is the right balance?

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