The US needs a single financial stability regulator, said Tom Ryan, chief executive of the Securities Industry and Financial Markets Association (SIFMA).  In a recent presentation at a Reuters conference, Ryan said that regulatory agency will need better information.
“Regulators are basically rear view people.” They have been operating with data that is three months old. To be effective, they need improved operations and technology and real-time data and information. Regulators can’t see the risks among institutions unless they have the data in real-time.

“We need a regulator who will be a collecting point for all this information.”

Ryan, who was director of the Office of Thrift Supervision (OTS) during the savings & loan cleanup in the early nineties said that the division of responsibilities among regulators contributed to the financial crisis. The OTS thought the sophisticated options-related mortgage products were fine, the Office of the Comptroller of the Currency (OCC) wasn’t sure, while the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve considered them too risky.

“They talked about barring some of these products but never did. Different institutions had regulatory authority and exercised it different fashions. A regulator with overview could have walked in and said ‘No, we need to stop. The complexity is too great.’”

The global financial crisis is not over; we have just entered a quiet period, Ryan added. In his presentation, he outlined key steps to improve financial services. Ryan said that an industry survey which SIFMA commissioned from McKinsey asking how to fix securitization showed that the top priority among investment banks is fixing the way credit rating agencies work.

“If we do not fix securitization we have a massive problem on our hands,” 55% of consumer finance was securitized, he added, and that has now fallen to a fraction of what it was. SIFMA, which had opposed laws requiring originators to retain a portion of their lending now supports 5% retention, he added.

“We are being very reasonable in our approach. We know that things are going to change. We want to help regulators change things in a responsible way. If they are not changed in a responsible way the industry, which is global and the lynch pin to economic development, won’t operate in an effective and efficient fashion.”

Saying Wall Street is ready to cooperate with the government in making improvements, he said the industry had pushed financial engineering to a level of complexity which was unsustainable.

“We admit part of this is our problem and we need to be constructive about fixing it.”

Both the US and the UK need a resolution authority to take care of institutions that are at risk or broken, such as AIG, Lehman Brothers, Fannie Mae and Freddie Mac, Ryan said.

“We are still making it up on the fly. We have conservatorship for Fannie and Freddie; the Fed pushed firms into bankruptcy because there was no resolution authority.”

Letting Lehman fail was clearly a mistake, added Ryan, but he had high praise in general for the way the government agencies handled an unprecedented crisis.

“The government did a helluva job and they had no playbook. They didn’t know how to back up the dump truck filled with money to stabilize the system so panic didn’t infect the financial system. They did it weekend after weekend, and closely coordinated with the EU – mostly the Brits – and the Canadians.”

He expects the US to have a systemic regulator by the end of this year or the beginning of 2010 and Europe to follow sometime after that.

“Politics in Europe are much more complex than in the US. They have a machine that is more press related so they are out front with ideas,* he added. But the complexity of getting something done is much greater where regulations have to be implemented by each nation state.

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