WASHINGTON, May 19 (Reuters) - U.S. regulators’ concerns about the market relying too heavily on the same risk models provided by a handful of financial firms will be “debunked,” a top executive at asset manager BlackRock said on Monday.
There is no evidence to support concerns that the market may be overly dependent on the same models because there is a lot of competition, said Vice Chair Barbara Novick of BlackRock , which offers such models. Risk is not concentrated in just a handful of third party providers, added Novick, who spoke at a panel discussion.
“There are many of them. The fact there are many of them tells you there is choice, and people can migrate from one to another,” she said at a conference convened by the Financial Stability Oversight Council to explore whether asset managers and their activities could pose risks.
“While it is worth looking at...I think in the long-term it will be debunked,” Novick said at the conference held by the FSOC, chaired by U.S. Treasury Secretary Jack Lew tasked with policing the market for emerging threats.
Last week, Reuters exclusively reported that FSOC staffers in March proposed the idea of creating score cards for third party risk modeling firms, amid concerns the market may be too dependent on the same products. [ID: nL1N0O001I]
Such third party firms provide a range of services, including asset valuation, investment advice and risk measurements to pension funds, asset managers, insurance agencies and banks.
BlackRock’s unit, known as BlackRock Solutions, is one of the market leaders in the risk modeling business, and FSOC staffers highlighted the various services it provides to investors in a closed-door regulatory meeting on March 25 about third-party service providers.
Documents reviewed by Reuters laid out the government’s concern that financial firms may rely too heavily on the same outside risk models and valuations, and that any flaws could result in a wide misunderstanding of the true risk of firms’ investments and other assets.
Flawed risk models played a major role in the 2007-2009 financial crisis. Financial firms’ internal modeling and assessments from credit rating agencies did not anticipate the systemic effect that a significant drop in housing prices could have on global markets.
The issue grabbed the spotlight again in 2012 when JPMorgan Chase & Co’s risk models failed to capture the dangers of its “London Whale” trades that led to a $6.2 billion loss.
Using BlackRock Solutions as an example, the staffers created a draft scorecard for the company that focused on risk factors such as user reliance on its investment decision and valuation services, and the amount of assets and liabilities.
A Treasury spokeswoman previously told Reuters that the proposed scorecard approach is consistent with the council’s mandate to look at issues across the financial system.
She added that no decisions have been made on the approach, that it is not designed for any particular company or industry, and should not be read into. (Reporting by Sarah N. Lynch; Editing by Diane Craft)