Bank regulators could use ‘war games’ as crisis prevention training

Introduction

Global bank regulators should borrow a page from the Pentagon’s playbook and add financial “war games” to their arsenal of tools aimed at preventing a repeat of the 2007-08 financial crisis, says a new watchdog report.

War games, along with broader use of bank stress tests, could help international regulators plan for potential economic emergencies, the Congressional Oversight Panel said in its latest monthly report analyzing the financial meltdown.

“On the international level, vigorous stress tests could identify the weakest points of the international financial system and allow policymakers to plan an emergency response. U.S. officials should encourage regular international crisis planning and financial ‘war gaming’,” the panel said in a statement accompanying its 162-page report. Congress created the group to assess how the Treasury Department handles its $700 billion Troubled Assets Relief Program (TARP) to revive the U.S. credit markets.

The panel is led by Harvard law professor Elizabeth Warren, who is herself in the midst of a war on Capitol Hill. Warren is a favorite among consumer groups for the top job at the new Consumer Financial Protection Bureau and its estimated $550 million annual budget, and she also gets the nod from Barney Frank, chairman of the House Financial Services Committee. But Christopher Dodd, chairman of the Senate Banking Committee, says nominating Warren would provoke an extended confirmation fight in the Senate because of the banking industry’s opposition to her. The Obama administration has not indicated who it favors for the high-profile job.

The report also aimed a round of light fire at the Treasury Department for failing to gather data on how some TARP money that bailed out U.S. banks also flowed to overseas banks. The department should collect more of this data “in the interests of transparency and to help inform regulators’ actions in an increasingly integrated world,” it said.

Quick fact: General Motors Corp., which received $50.7 billion in U.S. bailout aid, boosted sales in China and sold more cars there than it did in the United States during the past year. “It can be inferred that assets held as a result of capital injection programs by the U.S. government strengthened GM’s capabilities abroad,” the panel’s report said.

Other new reports released by the Government Accountability Office (GAO) and by various federal Offices of Inspector General (OIG):

• Illinois may lose $20.9 million for neighborhood stabilization if it can’t meet HUD Sept. 4 spending deadline (OIG)
• Nearly half of U.S. states regulate recycling of cellphones, computers, and electronic products (GAO)
• Justice Dept. opened 1 new probe of alleged Patriot Act civil rights violations in first half of 2010 (OIG)
• HUD audit shows public housing authorities did not overpay subsidies to apartment owners (OIG)
• EPA took average of 141 days to fill job vacancies despite 80-day goal (OIG)
• Federal Housing Finance Agency should analyze alternative collateral for farm, small business lending (GAO)
• Americare Investment Group may face $1.57 million FHA fine for ignoring poor credit histories of mortgage borrowers (OIG)