An American Banker story today, about bank regulators’ current efforts to make sure they and the banks fully understand their exposure to various risks, notes how little regulators knew before the financial crisis.
Not long before the subprime mortgage crisis metastasized into a global financial crisis, it dawned on U.S. regulators that they had a huge blind spot.
“Nobody had a clue where all those mortgages were being held,” said William Isaac, a former Federal Deposit Insurance Corp. chairman. “You should have had an information system that was tracking that. But nobody really thought there was a need for it because, after all, these mortgages were being securitized and sold off to investment trusts, and ‘who cares’ where they went. They were out of the banking system, and that’s all the regulators cared about. Now we know we needed to know.”
Where were those securities? U.S. commercial and investment banks owned one-fourth of them and Europen banks owned many more, where they were useful as collateral for repo loans and profitable for traders.