Andy Haldane:: Have we solved ‘too big to fail’?


If you still care about the role of Central Banks (you should, although it may not change much!) a guy like Andy Haldane is ALWAYS worth listening to. Here is his latest contribution…

As with systemic surcharges, the issue here is not to so much the bail-in principle, but its application in practice. Bail-in, whether of big banks, sovereigns or companies, faces an acute time-consistency problem. Policymakers face a trade-off between placing losses on a narrow set of tax-payers today (bail-in) or spreading that risk across a wider set of tax-payers today and tomorrow (bail-out).

A risk-averse, tax-smoothing government may tend towards the latter path – and historically has almost always done so, most notably in response to the present financial crisis. Next time may of course be different…

Have we solved ‘too big to fail’? | vox.

AH appeared in front of the Parliamentary Commission on Banking Standards (video) in November 2012. At the time I was prompted to explain my views on the subject of "ring-fencing"…

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Haldane on banking: “No change is not an option…”


Andy Haldane addressing the – Parliamentary Commission on Banking Standards

The first line of defence has to be risk management within the firm. We have seen a significant scaling up in both the resourcing and the influence of the risk management function in banks over the last 4 or 5 years… There are very few, if any, global banks who can conduct effective, consolidated, across-the-whole-balance-sheet risk management. Many of their systems simply make that if not impossible then certainly unsure. There is still work to be done to put IT systems and risk management systems on a wholly different footing that have been in the past. The systems are not in a state of health that allow this holistic across the balance sheet aggregation of risk. Of all the shocking things that I have come across in the last 4 or 5 years, among the most shocking, was the inability of the biggest banks in the world to simply add up the numbers. The IT spend that has occurred has tended to be focused on business lines. It hasn’t allowed a joining up of data, core data, across the whole balance sheet. It is a pre-requisite to the essential building block of effective risk management. It does not exist at present in too many big firms”.

AH is very assured, knowledgeable and speaks with great clarity on some very complex issues. This is well worth watching. Just in case my own comment doesn’t make it through the approval process, here it is!

Andy Haldane’s "Systems Thinking" approach to resolving so many of the issues at, or as close as one can realistically get to, source is a welcome breath of fresh air. The only thing that HAS been lacking is the means to measure (and therefore) manage both complexity and resilience of individual firms i2o [inside to out]. Creating more regulation and adding more cost to TREAT SYMPTOMS makes no sense.

“Adding complexity to cope with complexity is a seriously flawed approach” McKinsey. http://wp.me/p16h8c-yU

Basel III: Why bother when the prequel was a flop: “…complexity breeds complexity, and is subject to diminishing returns. Eventually the costs of increased complexity exceed the benefits” Prof John Kay http://wp.me/p16h8c-yj

KNIGHT or NINJA?
Reducing "flexibility" through partitioning or "ring-fencing", when AGILITY is a prerequisite for every business in the Digital Age, could only make sense to career regulators, lawyers and politicians intent upon ignoring the “law of Requisite Variety”. The era of the Medieval Knight is long past and a "suit of armour" may mask but won’t change culture!!!

In the words of Dave Snowden "Practice without sound theory will not scale".

Acceptance of the inability to build mathematical models…to mislead all-and-sundry…and of (Knightian) Uncertainty should be the start of a cultural change that, with the ability to measure the inherent (but currently ‘hidden’) complexity risk, enables transparency – whilst protecting sensitive commercial information – and the process of (re)building both system and systemic resilience. Ninja warriors live by a strict code and act with great agility.

Even when the DNA is similar “we can’t fix today’s problems with yesterday’s tools” http://wp.me/p16h8c-18g

 

FSA:: Lord Turner’s "paradise" lost


I’ve never met the man but I like the cut of his jib. Perhaps it is the novelty of someone in high (financial) office admitting what his peers feel they cannot…even though, with brief explanation, a child could differentiate good guys from bad!

Lord Adair Turner, the outgoing chairman of the Financial Services Authority and a candidate for Bank of England governor, said last night the FSA had spent its first eight years in a “fool’s paradise” of delusion about financial risk.

via FSA was in fool’s paradise, admits Turner | Herald Scotland.

So the problem is pretty well framed and, dare I say, understood. But WHO IS PREPARED TO LISTEN TO POTENTIAL SOLUTIONS OF THE VARIETY ADVOCATED ANDY HALDANE AT BY BANK OF ENGLAND?

Schumpeter, interrupted:: the impact of “destructive creation”


Euskara: Joseph Schumpeter ekonomialaria

Euskara: Joseph Schumpeter ekonomialaria (Photo credit: Wikipedia)

I wrote a couple of articles last year, citing the lack of creative destruction in UK Finance and Insurance as a problem, so it is very interesting to read this article. Also good to know that the trend for non-conventional thinking is flourishing at Bank of England.

destructive creation: the type of self-serving innovation intended to improve [short term] returns at the expense of or with out benefit to the customer.

I use the term “unconventional” but, when reading this paragraph, I was reminded of Gresham’s Law. Further food for thought perhaps…

If this is true, it suggests that the economy is suffering from a failure to innovate. Joseph Schumpeter, the granddaddy of innovation economics, first described the innovative process of one of creative destruction, of good ideas driving bad ones to the wall and of capital being reallocated, often rapidly and disruptively, from the old to the new. Broadbent’s analysis suggests that we need more of this if the economy is to recover.

via Schumpeter, interrupted. – Nesta.

Andy Haldane:: Still making sense – ‘Central banks should admit their mistakes’


My admiration for Andy Haldane‘s “thought leadership” grows with every paper, article, presentation or speech…he isn’t misled by symptoms because he understands what lies at the root of our global financial “difficulties”. After all, if a Director of the B of E is going to publish a paper on systemic risk, with a Professor of Zoology you would need to make sure you were on pretty solid ground, OR accept that the men in white coats could come to take you away at any time!!!

What WE need now is for such influential individuals to embrace this new thinking and to lead the organisations, with which they have influence, away from their point(s) of “critical complexity” in order that they can build the RESILIENCE necessary for times of such financial volatility. Whilst in his role at Bank of England, he hasn’t shirked from communicating a fundamental lesson about complexity, the threat of contagion, systemic risk and the fact that we are dealing with uncertainty (unknowns) as distinct from risk (knowns) – on the basis of the available evidence, this is considerably more than can be said for many in the risk management business within financial services! Read more of this post