Remarks by CEO Vikram Pandit at a Bretton Woods Gathering
A BIIA member was puzzled by the recent comments by Vikram Pandit, CEO of Citigroup and brought his comments to the attention of BIIA’s editor. Vikram Pandit stated:
“First we should implement stronger product regulation—for all participants in the financial system—to help consumers make better decisions”
“Second, disclosure requirements should be simplified for consumers and strengthened for institutions”
“Third, market structures should be reformed to create more transparency and invite more market discipline.”
“All of these ideas are united by a common principle: 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. Think of these ideas collectively as a version of the “wisdom of crowds” thesis applied to the financial system.
The first idea is to bring a corporate-finance approach to consumer lending. This may sound too hard to implement, but other countries have already done so to great effect. We in the U.S. have historically relied on credit scores – an imperfect and backward-looking measurement that focuses on past borrowing. But many Asian countries have gone to a forward-looking approach. Credit bureaus and regulators have jointly created databases and regulations that foster information sharing on both sides of borrowers’ balance sheets and their income statements. Lenders then scrutinize this data to make informed assessments of creditworthiness and the affordability of debt.
This obviously is not an inexpensive or simple fix. Yet the potential savings from increased safety should far outweigh the costs. The fact that other countries already have or are moving to adopt such a system should stop and make us think.”
To read the full speech click on the link: Remarks by CEO Vikram Pandit at Bretton Woods Gathering
The BIIA editor was puzzled as well and in the absence of further details interpreted Vikram Pandit’s comments as follows:
- Pandit wants to bring back a greater human involvement in credit assessment. That would work for larger and medium size businesses but not for the high volume consumer credit applications.
- Pandit hints that Asian countries have a better ‘mouse trap’ (information and credit assessment) and do things differently (forward looking vs. reliance on historical data and credit scores).
- He also suggests a greater use of income and balance sheet statements. That is the norm for businesses, but hardly workable for consumers and small businesses. Consumers have no balance sheets.
- From what we know about Asian credit assessment and credit information they do nothing better than what the US is doing. In many instances Asian credit bureaus are relatively young and some still lack critical mass which US credit bureaus have. Credit scoring is relatively new in Asia. There is a lot of catching up to do.
In summary: Bringing a corporate approach to consumer lending is not workable. Stating that Asian countries have a ‘forward looking approach’, thus having a better mousetrap is an ill-advised statement which will be hard to substantiate.
We are all for greater disclosure and transparency, however banks and regulators have failed to convince legislators that a safer banking system requires full disclosure from consumers and holding them accountable for providing accurate data.