JP Morgan Chase 2010 Annual Report Download - page 24

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• Financialrmsnowdiscloseagreatdeal
more information. Some of the information
provided is quite useful, such as disclosures
on funding, liquidity of assets and greater
detailoncredit.(Unfortunately,muchof
thisinformationisoflittleusetoanybody.)
• Therepurchaseagreementorrepomarkets
– in which large investors, institutions and
financial firms use short-term, collateral-
ized borrowing to finance some of their
investments – now require more conser-
vative“haircuts,”andnolongernance
exotic securities.
Shadow banking essentially is gone
People mean very dierent things when they
talkaboutthe“shadowbankingsystem.”
Whendiscussingit,Idividethisso-called
system into two pieces: The first piece is
one most observers barely knew existed. It
consisted of largely o-balance sheet instru-
ments like structured investment vehicles
(SIV).Thesecondpieceiscomprisedof
on-balance sheet instruments that were fairly
well-known, such as asset-backed commercial
paper, money market funds and repos.
The o-balance sheet vehicles, like SIVs,
essentially are gone. The on-balance sheet
instruments like money market funds, repos
and asset-backed commercial paper are
smaller in size, less leveraged, more conser-
vatively managed and far more transparent.
There are more regulators with proper Resolution
Authority and comprehensive oversight
Today, a greater number of regulatory bodies
are providing an unprecedented level of
oversight. New resolution laws and living
wills will give regulators even more tools to
use in handling a future crisis.
Banks’ trading businesses are far more conservative
BanksintheUnitedStateshaveeectively
eliminated proprietary trading. In addition,
exotic products are smaller in size and more
transparent, and trading books require far
more capital and liquidity to support.
Standardized derivatives already are moving to
clearinghouses
It is a common misperception that deriva-
tives were not regulated. They actually were:
bytheU.S.CommodityFuturesTrading
Commission(CFTC),theU.S.Securitiesand
ExchangeCommission(SEC)andvarious
other bank regulators. It also is a misconcep-
tion that derivatives pricing lacked trans-
parency; accurate market data on the vast
majority of all derivatives were readily avail-
able and easy to access.
Nonetheless, we agree it is a good thing
that standardized derivatives are moving to
clearinghouses. This will help standardize
contracts, simplify operational procedures,
improve regulatory transparency and reduce
aggregate counterparty risk. I will discuss
this issue in more detail later.
Boards, management and regulators are more
attentive to risk
At the corporate board and management
levels, risk management now involves much
greater attention to detail. Risk reviews are
increasingly thorough, risk disclosures are
deeper and any executive responsible for risk
taking is the recipient of extensive oversight.
Collectively, these substantial changes have
materially reduced risk to each individual
financial institution and to the system as a
whole.Whilesomeoftheimprovementsstill
need to be codified, they may go a long way
in creating the very strong kind of financial
system we all want.
We Need to Get the Rest of It Right —
Based on Facts and Analysis, Not Anger or
Specious Arguments
In their book, This Time Is Dierent: Eight
Centuries of Financial Folly, economists
CarmenReinhartandKennethRogostudied
eight large economic crises over the past 800
years. These crises generally emanated from
trade imbalances, foreign exchange issues
and real estate speculation. Included among
their observations was the fact that when the
crisis also involved the collapse of the finan-
cial system – in four of the eight crises they
studied – recovery took longer than expected
(onaverage,fouryearsinsteadoftwoyears).
But we should not assume that this historic
pattern is preordained or predictive. It also
seems likely that bad policy decisions made
inadvertently and without forethought –
during and after these crises – may very well
have increased the level, length and severity of
the economic stress attributed to these crises.