Enron’s failure led to a number of changes, though most were in the accounting and auditing field, one big change was in the banking industry. In 2004 the Federal Reserve and other authorities recommended a higher degree of scrutiny by the banking industry on the complex structured financing transactions of their corporate clients. The authorities wanted the banks to take on the role of policing its clients. The banks were to review how companies planned to account for and disclose the complex structured finance transactions(CSFT) in both their financial and tax reporting. In some cases, the banks were to go directly to the independent auditors of the client.
There are still some unanswered questions, most importantly the lack of a precise definition of CSFTs. The regulators have however mentioned that some structured finance deals, including , “standard public mortgage-backed securities transactions, public securitizations of retail credit cards, asset-backed commercial paper conduit transactions, and hedging-type transactions involving ‘plain vanilla’ derivatives and collateralized loan obligations,” wouldn’t typically be considered CSFTs.
On the risk management side, the regulators suggest setting up clear framework for review and approval of CSFTs, the policies and procedures should clearly lay down the duties of the people that work on these deals, the banks should have proper controls over the approval procedure of such deals.
Though the guidelines are much more relaxed from the 2004 proposals, the financial institutions will face numerous issues in implementing the changes, like defining what constitutes CSFT, how to design the review and approval procedure. Compliance with the new rule will also have cost implications, like, training costs for employees, costs to enhance control systems, designing procedures.
With the consumer lending market facing a volatile market, with decreased demand for loan products, higher delinquencies and defaults due to higher interest rates, now the banks have another issue to deal with, this time in corporate banking, the complex structured financial transactions.