Large financial institutions face risks from fraud, excessive regulation, illiquid assets, and privacy violations. To protect themselves, they engage in dialogue with regulators, monitor illiquid assets, invest in data protection, and conduct extensive due diligence on funds of hedge funds.
The large sums of money that are exchanged in the equity and debt markets often pass through the channel of large financial institutions. These financial companies are exposed to great risk from potential fraud and other factors, raising industry-wide concerns about the future. For some, those concerns surround the potential for a response to fraud by lawmakers that triggers too much regulation. Others may have concerns about privacy violations, while still others have fallen victim to scams.
Excessive regulation is a concern of large financial institutions. This concern includes a hunch that lawmakers might create arbitrary rules in markets to avoid doing anything. Regulators could be biased after a series of events showing instability and severe market losses have the potential to create a systemic effect on the economy. The worry is that whatever is decided will do more harm than good to capital markets and corporate profits. One way that key executives at large financial institutions guard against harmful regulation is to engage in dialogue with regulators to increase the chances that any changes that do occur will not be too damaging.
Liquidity represents the ease with which securities and financial assets can be converted into cash. Some of the assets held by large financial institutions are extremely illiquid, which can be a concern for these companies. There are ways to protect yourself against the threat of not being able to generate liquidity. For example, if a large financial institution monitors client capital in securities that are considered illiquid, they may assign a lock-up period during which investors cannot withdraw capital. This feature can prevent the financial institution from selling the assets in a frenzy in an attempt to satisfy the demands of the clients.
Fraud is a concern of large financial institutions. These companies have access to highly sensitive information belonging to customers. If there is a security breach of some sort, whether via the Internet or some other rogue leak, the results could be detrimental to customers and the company’s reputation. To combat this, large financial institutions spend large sums of money on data protection and risk management systems.
Funds of hedge funds are professionally managed investment vehicles that invest in other hedge funds. Some large financial institutions manage funds of funds, and there are concerns about the potential to invest in some fraudulent scheme. Typically, extensive due diligence and verification steps are taken to protect the institution from fraud, but large companies have historically been exposed to other investment scams.
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