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Rebuilding the Global Financial System

Booz Allen Hamilton Vice President Margo Fitzpatrick was part of a panel titled “Rebuilding the Global Financial System” on July 3, 2009, at the Aspen Institute’s Aspen Ideas Festival. Fitzpatrick, who is part of a leadership team for Booz Allen’s financial reform initiative, moderated a discussion with Sir Nigel Sheinwald, British ambassador to the U.S.; Raghuram Rajan, the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business; Nancy Birdsall, founding president of the Center for Global Development; and David McCormick, distinguished service professor at Carnegie Mellon University and a former undersecretary for international affairs with the U.S. Department of the Treasury. Following the panel, Fitzpatrick shared these additional insights.

You asked the panelists, How would you characterize the financial crisis from a global perspective and how far do we really need to go with financial reform? What do you think?

Many ideas have been discussed for improving financial reform. Some of the proposed changes include merging agencies, establishing a new agency for consumer protection, and expanding the jurisdiction of other agencies to regulate over-the-counter derivatives and hedge funds.

Regardless of the direction, critical improvements are needed in the areas of advanced data analytics to enhance enforcement and market surveillance; alternative examination approaches to manage systemic risk; improved information sharing across agencies; better metrics; and human capital acquisition and development to retool the current workforce.

Given the highly interconnected nature of the global financial network, how can international financial institutions such as the IMF and World Bank play a more productive, stabilizing role?

I think that the financial crisis has brought both the IMF and World Bank to the forefront and has emphasized the need for more global coordination. To do this effectively, global coordination and communication mechanisms must be established and implemented to facilitate dialogue about overarching systemic risks. The use of sophisticated surveillance technology and analytics, similar to what is used in the intelligence community, is also required to provide insight into complex interconnected networks. Such insight would enable more transparency across markets. In addition, performance measures to gauge the effectiveness of recovery or stabilization programs are required. These metrics would empirically demonstrate the value of various stabilization programs and may also build public confidence and support.

Should we be thinking about financial reform now, at the same time we’re trying to deal with the current crisis?

Yes. The opportunity is now for federal finance regulators to obtain the critical resources they need. As we have seen over the past six months, the federal regulators have been under increased scrutiny and pressure to strengthen their ability to effectively identify and address risk and fraud in the marketplace. But resources are limited, and the markets, products, and institutions being regulated are increasingly sophisticated.

I think that an effective path forward involves creating a new process to identify and address market risk and fraud early. This requires different resources than what is required today. For example, new tools are vital to capture, fuse, and analyze industry, social network, and open source data to detect meaningful patterns. New workforce skills are required to perform advanced analytics. And new processes are required to effectively target and align examiners and enforcement agents to higher risk areas for further investigation and analysis.

David McCormick talked about a “new normal” in which the U.S. grows more slowly and emerging markets play a greater role. Is that what you see?

Well, I’m seeing that many views are being provided about the increased future role of emerging markets and the pace of growth in the U.S. Regardless of which perspective you support, there are new ways of doing business that the federal agencies may want to consider to be more effective in the “new normal” whatever shape it may take.

For example, integrated and interagency case management would strengthen examination and enforcement efforts. Cross-case linkages alone could provide insight into early issues regarding systemic risk or fraud that may not be captured today. Information sharing across agency firewalls will also strengthen the regulator’s ability to protect investors and depositors, especially if more than one regulator is providing oversight of a financial institution. And new operating models may also emerge as examination and enforcement activities converge or evolve.

Learn more about Booz Allen's participation in the 2009 Aspen Ideas Festival.

story posted July 7, 2009