Uniform Bank Performance Report - Anderson School of Management

The securitization of assets, specifically MBS, is another harmful component of the banking system the
financial world is trying to figure out how to regulate. The harm caused by mortgage securitization is due
largely to the ease by which individual entities involved in the process are able to pass the risk of the
underlying assets on to others. This essentially means that there is a flaw in the design of the overall
procedure that allows it to be easily corrupted. Therefore, changes to the structure of the process will
have to be made. One of these changes is that high‐risk loans, such as Alt‐A, Interest only, and NINJA will
be done away with. Also, since market forces alone no longer seem to provide sufficient incentive for
lenders to practice responsible lending, this responsibility may have to be delegated to another type of
regulatory entity with the ability to identify problems in specific firms’ lending practices. Perhaps the
standardization of lending criteria and the establishment of a government run lending clearinghouse is
something we may see in the near future.
Other differences in today’s banking system include:
The SEC and other regulatory agencies have been harshly criticized for their failure to catch
time‐bombs such as CDS and MBS before they got out of control. In today’s banking system,
participants can expect to be watched over more closely than ever.
Ratings agencies have shown their vulnerability to corruption. Accordingly, trust in these ratings
has diminished.
The credit market is tighter than it has been in previous years. Banks are still using capital that
would have previously been used for lending, to bulk up reserves for credit losses.
Systemic risk has been proven to be a very real threat.
The government has shown that it will provide bailout under emergency circumstances (see
pg.33). Moral hazard is now a threat.
Emerging markets in South America and Asia are growing rapidly and will continue to alter the
global financial environment and the balance of power among countries.
Changes in regulations regarding off‐balance sheet items and accounting practices are imminent.
(see pg. 38)