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Change in Banking System's DNA Needed: Economist

UBS’s $2 billion rogue trading loss highlights the need for a pan-bank risk management body, Don Tapscott, author of "Macrowikinomics: Rebooting Business and the World," and chairman of Moxie Insight think tank, told CNBC.

UBS headquarters in Zurich, Switzerland.
Steffen Schmidt
UBS headquarters in Zurich, Switzerland.

“Rogue traders are not the problem; they are symptomatic of a deeper problem that we do not manage risk effectively in the banks,” Tapscott said.

“We need to fundamentally change the DNA of the banking system. Something like risk management needs to be re-thought completely.”

Tapscott said that in the case of so-called toxic assets, for which there is little or no demand, banks were hampered by their reliance on "marking-to-market" valuation techniques.

“The banks have 1 trillion Euros, plus or minus 1 trillion of toxic assets on their balance sheets. Nobody knows how to value these things. You can not mark-to-market, because there is no market. Nobody wants to buy these things,” he said .

To solve this problem, the economist advocated a “commons” financial modeling program, in which the bulk of this type of risk management would be managed by a single oversight body, rather than individual banks.

“We should take the information about these assets — essentially risk management information — and place it in a 'commons’, where the world’s modelers can come together and work out the value of these things. If we do that, we can get the risk off the balance sheets, free up the banks, and start lending money again,” Tapscott said.

“I am not arguing that a collective of financial modeling will solve all the problems in the banks, but it will address the big problem of these toxic assets.”

In response to the suggestion that banks might be unwilling to relinquish their ability to individually model risk, Tapscott said: “Well hello, it hardly conferred competitive advantage [during the 2008 crisis]. Together these models almost brought down the global capitalist system.”

The author said a number of centralized risk modeling initiatives were underway, including one called the Open Models Valuation Corporation. This, he said, has gained traction, “with some of the big banks and regulators in Washington DC.”

Tapscott added that the world had reached “a turning point in history.”

“Arguably, the industrial age has finally run out of gas. We need to make profound changes across all of these institutions, and our economy, and our society,” he said.