Banks in Crisis
With the Bear Stearns collapse and the instability facing Freddie Mac and Fannie Mae, it’s clear that commercial and investment banks are feeling the sting from the current state of the economy. “Banks in Crisis – Are the Government Safety Nets Working?” a program presented by the Section of Business Law Committee on Banking Law at the ABA Annual Meeting in New York, addressed the possible causes of the crisis and provided advice that federal regulators and banks should consider moving forward.
Panelist Joyce Hansen, deputy general counsel of the Federal Reserve Bank of New York, attributed the current state of the banking industry to last year’s decline in the U.S. housing market, which furthered a downtrend in the value of assets, as well as caused liquidity difficulties.
In addition, with a soft market for those assets, banks started looking for new sources of capital, added panelist Sara Kelsey, general counsel of the Federal Deposit Insurance Corporation.
In the case of the home lending industry, new products flooded the market without credit ratings. New products, in general, don’t have the historical performance data needed for the ratings agencies, said panelist Joseph R. Mason, professor of business at Louisiana State University.
Federal regulators will be examining these issues and more in the coming months. A working group of President Bush will be assessing issues in the marketplace. The Securities and Exchange Commission will be looking at the disclosure of rating agencies. And the Federal Reserve will be reviewing ways to strengthen financial resiliency.
So what does this all mean for bank directors? “Be diligent in your risk management process and internal controls,” said Charlotte Bahin, senior counsel for special projects of the Office of Thrift Supervision. “When things go wrong, take prompt corrective action. Directors need to be diligent of the environment and management, and managers need to keep directors informed. Board members need to be more vigilant as well.”