After so long it is encouraging to know that complexity in banking is, at least, getting a more frequent airing by others! But, unlike the headline in the recent FT article, we (at Ontonix) don’t believe that “fighting complexity is futile“…far from it! Einstein knew of the rewards available to those who “reached” the simplicity beyond complexity. The scale of the problems created by the excesses of our financial system should tell us that the quest is only futile if banks DON’T adopt a culture and the tools that facilitate “transformation”.
Joining the dots between the ongoing banking crisis and the enlightened output from, such as, Andy Haldane resolves nothing until we act upon what we have learnt! We can’t afford to overlook the obvious shortcomings in Risk Management, Regulatory failures and abandonment of Corporate Governance.
But SURELY, as the author has identified some of the current problems, it can only be a matter of time before sufficient number of enlightened, influential, individuals reach their “flipping points“, act to influence and educate the crowd – at Ontonix we are doing our utmost to aid this process [refer following video] – so we reach a “tipping point” and effect a, long overdue, paradigm shift.
Krawcheck offers some basic ideas for “paring back the complexity risk” in banking. She argues for looking at the bank’s overall risk profile; for compensating bank executives based on the bank’s risk profile (in terms of debt and equity); paying out dividends as a percentage of earnings; reforming the credit agencies (sigh); and urging boards to worry about booming, not struggling, businesses. (The last advice makes sense, but if we need to remind boards of that, we’re really screwed.) All this is very nice, but very broad — and given, yes, the complexity of banking, it’s a little hard to see the kind of effect it would have.
In fact, except for her first notion, I’m not sure it would do much to either rein in complexity or too-big-to-fail. The devil here is in the details. How would you calculate the “overall risk profile”? Is this a mark-to-market process, in which daily, weekly or monthly numbers are generated, like the much abused and suspect value-at-risk? How, given the enormous complexity, would these metrics be generated — and by whom?
If JPMorgan Chase & Co.’s big ugly trade managed to escape the bank’s internal risk management operation — not to say regulators — how would that have found its reflection in the bank’s overall risk number? It’s a rule: It’s the stuff we don’t know, or don’t want to know, that tends to kill us. And just remember: We’ve had a devil of a time just trying to provide guidelines on bank capital. What makes anyone think calculating an overall risk profile would be easier?
Hopefully the following video will go some way to answering critical questions and paving the way to a, less volatile, sustainable future…