What Are the Special Concerns of Large Financial Institutions?

Geri Terzo

The large sums of money that are exchanged in the equity and debt capital markets often go through the channel of large financial institutions. These financial firms are exposed to a great deal of risk for potential fraud and other factors, causing concerns throughout the industry about the future. For some, those concerns surround the potential for a response to fraud from lawmakers that triggers too much regulation. Others may have concerns about violations of privacy while others still have been the victims of scams.

Large financial institutions face a high degree of risk related to fraud and other potential abuses.
Large financial institutions face a high degree of risk related to fraud and other potential abuses.

Over regulation is a concern of large financial institutions. This worry includes a foreboding that lawmakers might create arbitrary rules in the markets to avoid doing nothing. Such a tendency might be possible by regulators after a series of events that prove instability and severe market losses have the potential to create a systemic effect on the economy. The concern is that the something that is decided will cause more harm than good to the capital markets and corporate profits. One way that key executives at large financial institutions protect against harmful regulation is to become part of the dialogue with regulators to increase the chances that any change that transpires is not overly detrimental.

Liquidity represents the ease at which financial securities and assets can be converted to cash. Some of the assets held by large financial institutions are extremely illiquid, which can be a concern for these firms. There are ways to protect against the threat of becoming unable to generate liquidity. For instance, if a large financial institution oversees capital for clients in securities that are deemed illiquid, they can assign a lock-up period during which investors cannot withdraw capital. This feature may prevent the financial institution from selling any assets in a frenzy in an attempt to satisfy client demands.

Fraud is a concern of large financial institutions. These firms are privy to highly sensitive information belonging to clients. If there is a security breach of some sort, either over the Internet or through some other unscrupulous leak, the results could be damaging to customers and the reputation of the firm. To combat this, large financial institutions spend large sums of money in data protection and risk management systems.

Fund of hedge funds are investment vehicles run by professionals who invest in other hedge funds. Some large financial institutions run fund of funds, and concerns exist surrounding the potential for investing in some fraudulent scheme. Great measures are typically taken in due diligence and vetting to protect the institution from fraud, but historically large firms have been exposed to other investment scams.

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