Citi CEO Pandit calls for benchmark portfolios to reduce systemic risk

In today's Financial Times, Citigroup CEO Vikram Pandit proposes a new way to reduce risk in the financial services system: "benchmark" portfolios.

He writes, in part:

"Currently, banks are required to hold specified levels of capital relative to their outstanding loans. Regulators set those requirements based on their judgment of market risks and worst-case scenarios.

There are limits to this approach. As practised, the formal banking sector receives by far the highest level of scrutiny. The rest of the field is left open for the non-bank financial system to serve other customers from outside this regulatory umbrella. And it presumes a level of clairvoyance that no regulator can possess. If there is one lesson from the last crisis, it is that the best informed observers of the markets - and the markets themselves - cannot always predict what will happen next...

What is needed is a way to compare apples with apples. Regulators should create a "benchmark" portfolio and require all financial institutions, not just banks, to measure risk against that. The benchmark portfolio would not actually exist on the balance sheet of any one institution. Rather, it would be a collection of real investments that stand in for the kinds of assets that most financial institutions actually hold at the time. What is more, its contents would be 100 per cent public..."

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