Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy
From The Hill
In a recent column, I discussed cyber risks that could adversely affect bank and brokerage customers and explored the conditions necessary for development of actuarially sound insurance products at the retail level to protect individuals from the most catastrophic of cyberattacks to their accounts.
While new consumer-oriented insurance products are being offered to guard against cyberattacks, they don’t necessarily mitigate a consumer’s nightmare scenario. That scenario goes beyond having personally identifiable information stolen to having your bank’s digital records wiped out or otherwise corrupted by a malicious actor, eliminating any history of your account balances. So this is the question: would your bank or brokerage stand by you in the event of such an attack or is cyber risk insurance necessary?
Regardless of the availability of cyber risk insurance for individuals, the threat to consumers flows from vulnerabilities within and across financial institutions. To the extent an individual’s bank or other financial services provider has strong institutional defenses, risk to individuals falls dramatically.
Lax mortgage lending by banks has long been recognized as a major cause of the financial crisis. But banks played another, lesser-known role in the crisis. In much the same way that banks failed to verify the creditworthiness of people buying homes, banks also neglected to verify financial qualifications of those building homes — developers, contractors and other firms in the construction industry.
Capital allocation is a significant function for company directors. How much of the company’s profits gets reinvested in the business rather than distributed to shareholders through cash dividends or share repurchases is a critical decision companies must make. Boards of directors typically approve a dividend policy and precise amounts for each quarter: Everyone knows that cutting the dividend will result in a sharp decline in the share price.
Yet in many companies, decisions about the level and timing of share repurchases are left to management. That stems partly from differences in legal requirements: The board must formally approve the amount of the company’s quarterly dividend but not its repurchases. Moreover, the implementation of the repurchase program is heavily influenced by the company’s actual cash flows.
Nevertheless, share repurchases are something to which directors should pay more attention. Specifically, directors should carefully consider the capital allocated to repurchases relative to the company’s realistic opportunities for value creation through internal development or external acquisitions. They should be highly skeptical of large repurchase programs that are financed by selling debt rather than paid for out of company profits.
President Donald Trump has vowed to bring manufacturing jobs back to the U.S. through new policies and regulatory reform. But this effort faces a strong headwind: In all walks of life, human employment is being challenged.
Many manufacturing jobs have been replaced by robots. Meanwhile, drivers are on their way to being displaced by driverless cars, tax professionals by software, and much more.
Recently Trump turned his attention to the financial services industry, signing two directives aimed at repealing portions
But regulatory change isn’t likely to repel the march of the robots that is transforming the financial services business. FinTech — the finance industry equivalent of robots in manufacturing — is too far along for that. If future investors and consumers of financial services begin to trust FinTech platforms as they have done in retail and travel, then fewer humans will be working in finance.
Small firms and startups are often referred to as the “engine” of the U.S. economy because of their ability to create new jobs. For example, firms with fewer than 500 employees accounted for 63% of net new U.S. jobs created between 1992 and 2013.
Yet despite their importance to the economy, small firms often face difficulties accessing bank financing. These firms are typically opaque — that is, they don’t attract media or analyst attention, or produce lengthy financial reports. As a result, banks cannot rely on public information to assess loan applications from small firms. Instead, the firms must provide the bank with information demonstrating their creditworthiness. This process can be cumbersome and expensive for small firms.
In many cases, a bank can avoid imposing onerous reporting requirements on a firm by relying on its experience lending to similar firms from the industry or community to make loan approval decisions. In theory, this arrangement can make it easier for small firms to get credit.
Yet regulators pressure banks to collect more documentation from their largest exposures — precisely those areas where the bank has the greatest experience — a policy that can work to the disadvantage of small firms.
For example, a bank that has expertise in lending to small manufacturing companies might be the best able to access lending risk, and therefore make the soundest lending decisions on new businesses in this sector. But the bank’s expertise works against it since regulators require banks with heavy concentrations of loans in certain industries to collect even more documentation.