IIF at 25: TIE sat down with the Institute of International Finance's Charles Dallara to discuss the future of the global financial system.

• Author: Dallara, Charles
• Position: Dialogue with Charles Dallara - Interview

TIE: Congratulations on the twenty-fifth anniversary of the Institute of International Finance. Under your tutelage the membership has increased dramatically and there appears to be a new vibrancy to the Institute.

Dallara: Thank you. It's obviously been a team effort. We have a small but strong staff here. People are shocked when we tell them that the total number of employees remains under one hundred, but we achieve a great deal and we are rather proud about our efficiency.

Importantly, we've been fortunate in having a very strong and supportive Board that has seen the value of growing and building the organization. Our number of bank members has tripled over the last 12-13 years. Our total number of members has more than doubled. Part of this is due to the willingness of our own Board to reach out, along with the growing membership from emerging market financial institutions, asset managers, and hedge funds that has more than offset the decline of members through the consolidation process, especially in the United States.

TIE: The Institute appears to have taken on an important role, particularly in the last decade. Financial regulators--really once a side show to the broader market issues--have become the main event. After the subprime crisis, banking regulation has become the tail that wags the financial market dog. How can the Institute fit into this new environment? Clearly there's going to be a lot of discussion about where this system goes from here.

Dallara: It's very important for the Institute to sustain its role as an effective bridge between the public and the private sectors. It also serves as a forum to advance best practices in risk management and in overall operations of the capital markets, where there have clearly been some shortcomings.

Obviously, it's a bit early to have a clear view of the lessons learned. Yet one can't help but realize that there were some serious risk management deficiencies in terms of default estimates right at the ground level, which is subprime lending. Deficiencies of risk management are clearly emerging in the LBO credit market, which now has a substantial volume of hung deals that will need to be resolved among the private equities sponsors, by the corporations, and by the banks themselves.

Several other issues merit considerable scrutiny. One is the role of rating agencies and the process by which they evaluate structured products. The second is the issue of just how risks are transferred or not transferred when banks create these so-called conduits which become vehicles backed up by securitized assets. We are going to have to rethink what we thought we knew in terms of the linkages between credit risks, markets risks, and reputational or operational risks here when it comes to the creation of these new conduits and all of the complex products associated with them.

At the Institute, we see our role here as framing a very thoughtful industry response on critical issues along with some articulation of best practices going forward. We're open and honest in discussion with the regulators. The final point is that we have been able to develop a very vigorous, a very productive, mutually...