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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Must the future of a country be qualified only by its public debt?

In truth, instinctively, we already know the answer to this question but THE point is that by measuring just how complex we can gain new insight and the potential to make economies more resilient.

Why is the economy is so complex? The reason is that there are a lot of factors involved, these factors cannot be easily measured as mathematical variables, if we measure some of them, there are a lot of links among the variables that we have chosen, there is not a perfect mathematical model of these relationships, and there is a lot of uncertainty about the way that rulers will make decisions in the future and the consequences that will produce these decisions.

via October 2012: Must the future of a country be qualified only by its public debt? « Guru’s Analysis.

Linking Executive Compensation to Sustainability Performance:: 2Sustain

English: Balance of Sustainability

English: Balance of Sustainability (Photo credit: Wikipedia)

As sustainability issues become more common in the boardroom and the volume of shareholder proposals related to those issues grows, the link between corporate sustainability performance and executive compensation is expected to become more important, according to the latest Director Notes report from The Conference Board.

Interest has grown among shareholders in recent years about the inclusion of sustainability performance as part of the compensation formula, notes the report, “Linking Executive Compensation to Sustainability Performance.” The growing value that shareholders are placing on long-term performance and corporate sustainability serves as an indicator for directors that nonfinancial performance may become a more prominent topic in future proxy seasons.

“Today the vast majority of executive compensation schemes are based almost exclusively on companies’ financial performance, rarely taking into account performance on increasingly important environmental and social issues,” says Thomas Singer, a research associate at The Conference Board and author of the report. “However, we are seeing a gradual shift toward a notion of performance assessment that incorporates nonfinancial elements, and there are a few leading companies that offer great examples of what this looks like in practice. The growing importance of sustainability in the boardroom means we can expect nonfinancial performance to play a greater role in future executive compensation schemes.”

The report discusses corporate directors’ increasing interest in sustainability matters, progress being made toward a notion of performance assessment that incorporates nonfinancial elements and efforts by some companies to explain how they link incentive awards to sustainability targets in response to shareholder proposals on this topic. “Linking Executive Compensation to Sustainability Performance” provides data on and examples of companies that are already tying executive compensation to sustainability performance. It also highlights the challenges involved in creating a compensation framework that incorporates sustainability performance, and provides data and voting results for shareholder proposals linking sustainability performance to executive compensation since 2009, and board responses to such proposals.

Linking Executive Compensation to Sustainability Performance

Risk Management:: we have one history but multiple futures – can we “fix” it?

OK, so, in Economics and Finance we hear a great deal about “models”. Despite the obvious and much written about, failings, great store is put in their accuracy and ability to predict…even though, we already KNOW that, meaningful prediction about future events, based upon past events and outcomes, IS NOT POSSIBLE! 

We are [still] in crisis and surrounded by increased volatility, uncertainty, complexity and ambiguity: most of it of our own making.  The need for CHANGE, to give us hope worth clinging to, is even more pressing. But…

…we can’t begin to rebuild trust, an industry or economies without reliable tools:

Financial and Political mismanagement, misinformation, manipulation and mis-selling brought us to this point and mere rhetoric about “change” cannot mask these facts!

TRUST needs a foundation: the failure of past models, techniques and tools tell us that, without TRANSPARENCY, we need evidence from those that claim the ability and desire to (re)build a RESILIENT and SUSTAINABLE future.

One in which the integrity of the entire “structure” is ROBUST from the bottom up, or inside out [i2o].

Complexity in FS: why trying to predict…is [still] futile

I thought it about time I revisited an article that s-p-e-l-l-s things out about as plainly as they possibly can be….

CxU=F…the ability of the system to adapt, often in completely unpredictable ways, means that you can’t model it and you can’t foresee the outcomes of any strategy of intervention. It’s all completely unknowable in advance. Once you accept this it becomes suddenly apparent that a huge swathe of modern finance is complete rubbish. For example, in a complex system you expect to see “tipping points” or phase transitions when the system suddenly and unpredictably switches from one stable state to another. As Caballero and Krishnamurthy have documented this appears to be exactly what happens during the episodes of liquidity hoarding and flights to quality associated with financial crises. People suddenly switch from a belief that they’re in a state where risk is measurable based on probability to one characterised by fear in the face of absolute uncertainty, so called Knightian uncertainty.

So, in the depths of the panic of 2008 we saw investors selling Collateralised Debt Obligations at almost any price largely because they didn’t know how to analyse them. What it looks like is that they bought these sub-prime backed securities because they’d been given the highest rating possible by the credit rating agencies. When some of these went bad the investors – many of them supposedly high powered institutions – belatedly recognised that they hadn’t got a clue about what they’d bought and sold, virtually at any price. One day they had nice risk models giving default probabilities, the next day they had junk.

via Complexity In Financial Systems: Why Trying To Predict The Next Crisis Is Futile | Timarr.