Chase Curve

In the heyday that preceded the crash, banks did not take the public sentiment about huge bonuses seriously, but what’s surprising is that since the crash they haven’t figured out a way to reward risk takers without risking their reputations.  When the gap between public expectations of corporate behavior, and the actions taken by corporations to address those public expectations becomes too wide, no matter how much corporations lobby, some form of restrictive regulation is created to address what the public views as unacceptable behavior.  This observation was first proposed by Howard Chase who coined the term issue management in 1976, and over the last decade failure to mind the gap has clearly driven an onslaught of regulation.  While regulating the size of banker’s bonuses won’t fix the financial system, it could change bankers’ behavior and take off the table a public policy issue that is clouding financial system reform.

“Today, my administration is proposing a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression,” announced President Barack Obama today from the White House.

While the changes are big, they are not as sweeping as they could have been.  Political obstacles prevented the emergence of an uber-financial-regulator that would have combined the many financial regulators into one agency.  So, while significant, it is important not to overstate the extent of this reform.

Some of the reform announced formalizes relationships and practices that already exist.  For instance, the new Financial Services Oversight Council formalizes the collaboration between supervisory agencies that already exists.  However, there are three areas of significant change, and for CIOs of banking, investment firms, and consumer credit firms affected by the reform, the changes will be impactful.

First, many investment firms that have been lightly regulated like hedge funds and private equity firms will now have to be registered.  Second, large firms that are considered too big to fail will come under the Federal Reserve Board’s new systemic risk oversight.  Third, consumer credit firms will face a new federal regulator in addition to state regulation.

Gartner will publish research shortly with our recommendations for CIOs and IT managers on how to manage their risk management and compliance activities in light of these regulatory reforms.  In the meantime, my colleagues and I are at your service and clients should schedule inquiries to discuss these developments.