CEO Vikram Pandit on Friday said that non-bank financial institutions need stronger regulation, to "create a level playing field" with traditional banks.
Speaking at the Bretton Woods Gathering in Washington, Pandit said that "the financial system is far larger than just the banks," and that "capital markets have been steadily dis-intermediating for at least the past century," with capital flowing "directly from point to point, often bypassing the old hubs," like New York.
Citigroup CEO Vikram S. Pandit
As part of his solution for a better approach for regulators to take in managing financial risk, Pandit suggests moving away from the "current model" that "tries to manage risk at the institutional level," which "applies only to the formal banking sector," and focus on reforming market structures, "stronger product regulation," to level the playing field for participants and "to help consumers make better decisions" and to simplify product disclosures for consumers.
Pandit said that the "common principal" of his suggestions is that "the more information that we can make available to a larger number of participants in the system, the more safely and efficiently the financial markets will operate," calling his set of ideas "a version of the 'wisdom of crowds' thesis applied to the financial system.
In what could be considered a radical rethinking of consumer credit underwriting for U.S. lenders, Pandit suggests that rather than relying on "credit scores--an imperfect and backward-looking measurement that focuses on past borrowing," lenders might move toward a system using a "forward-looking approach," that has already been adopted in "many Asian countries," where credit bureaus and regulators "have jointly created databases and regulations that foster information sharing on
sides of borrowers' balance sheets, and their income statements."
In justifying a product-focused regulatory approach as a way of improving information for consumers, Pandit provided an example of purchasing a car, when "consumer is likely to choose the financing plan with the lowest up-front cost," even though "once every other cost and fee is factored in, the car with the lower monthly payment is often more expensive than the one parked next to it with the higher monthly payment."
On the subject of institutional trading, Pandit said that although "the market for equities could not be more transparent...derivatives on the other hand, remain too opaque, and that "clearing houses are better" than the current over-the-counter trading system, and that "instituting initial and maintenance margin requirements across the board for derivatives would be better still."
"But best of all would be to create an exchange network for a good majority of derivatives," which, the CEO admitted wouldn't win him "any popularity contests."
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Written by Philip van Doorn in Jupiter, Fla.
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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.