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].

Banking: “culture” a greater threat to ROE than Basel


When the obvious conclusion is “politically sensitive” it is best for firms such as McKinsey to talk in terms of what returns investors want from the future banking model. But isn’t this part of the problem?

(McKinsey)…estimates show that if banks maintain their existing business models, their average return on equity (ROE) would fall to 7 percent by 2015, from its current level of 11 percent, against a cost of equity projected to be more than 9 percent.

Investors want to see the management teams of banks propose credible, far-reaching plans to close this gap. The message that investors are now sending—shares of banks will be valued at levels implying that they will not earn their cost of equity—has profound implications for a US economy dependent on a healthy banking system to support recovery and fuel growth.

Of the three threats, the most significant comes from the Basel III requirements, proposed by the Basel Committee on Banking Supervision. Without mitigating actions, they could reduce the ROE of some banks by as much as five percentage points. While the details are still being determined, we estimate that the US banking system will need an additional $500 billion in retained earnings or new equity to meet the new capital adequacy standards (assuming the current asset level and mix).

The second threat is the continuing deleveraging of consumers. The history of the past 100 years suggests that when excessive borrowing is a principal cause of a recession, consumers and businesses spend the next seven to eight years rebuilding their balance sheets…

“Helping Banks is Hurting Insurance Industry” Geneva Association Tells G20


Collapse_smallPlease forgive me for not reaching for the paper tissues  THE real story is that helping banks is hurting …SOCIETY!

Without doubt, the activities of billions of ordinary citizens did not give rise to systemic risk! FACT!

Do we really need to ask, in whose interest is it for the insurance industry to tell only half a story?

OK, so the language is clever “…traditional insurance activities do not give rise to systemic risk”. Hard to argue with. But this communiqué smacks of insurers’ girding their loins in anticipation of the fallout from further, inevitable, global financial turmoil.

Presumably choosing to distance themselves and pointing their fingers at the banks is intended to stave off the threat of further regulation. Even if that is, ultimately, unsuccessful, it may serve to delay unwanted scrutiny and provide the opportunity to adapt the current model. It could also be touted to hard-pressed businesses as a “justification” of a potential tsunami of premium increases that may follow the next financial earthquake: growing seismic activity in the markets serve as a warning.

The insurance industry is, hardly, in the “innocent bystander” category!

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Risk DNA: how robust yet fragile a system really is!


Experienced business people look at me like I am mad when I use the human body or brain to illustrate how important it is that a business be properly structured!

But I’m not mad, I’ve just taken the time to give it more thought, ask more questions, read more research and to assess the hard quantitative evidence that led me to this conclusion…and I am not alone!

If you can believe me that there is a universality about systems and that, if a single letter in a DNA sequence is missing a person may not be born at all or be destined for a life of ill-health, perhaps you will understand that, the performance of a business system too will be determined by its internal structure. Check this out:

“the prospect of using the genome as a universal diagnostic is upon us today”

I love this quote from the presenter: “the prospect of using the genome as a universal diagnostic is upon us today

Systems that have a “flawed” structure or processes (at nano or micro level) generate risk that can have enormous consequences at macro level, upon the systems with which they are connected or can limit the number/nature of networks with which it can communicate.

As businesses focus upon macro they are ignoring valuable insights.

Too much focus upon managing risk “overlooks” endogenous, often, self-generated risks, that CAN be addressed – making the system more robust. Preferring instead to assume a greater threat from exogenous risks, over which there can be only limited influence or uncertainty – for which a fragile system is ill-prepared!

More lessons from nature: Fragile systems are not resilient.

FT.com: Financial institutions stare into the abyss


An illustration depicting the shaky situation of financial institutions

The world economy once again stands on a precipice. Finance ministers might want to look straight ahead, but investors are forcing them to peer down to the abyss.

As advanced economies slow sharply and emerging economies wonder whether inflation or recession is the greater threat, the need for finance ministers to find a way to achieve their ambition of “strong, stable and balanced” global growth has rarely been more urgent.

Christine Lagarde, the new managing director of the International Monetary Fund, has urged countries make necessary adjustments to restore confidence.

“I believe there is a path to recovery, much narrower than before, and getting narrower. To navigate it, we need strong political will across the world―leadership over brinkmanship, co-operation over competition, action over reaction,”

Could it be that it takes for the global economy to, once more, stand on the very brink of collapse before common sense prevails?

An institutional culture driven by Greed, Fear and Ego brought us to the edge and has been allowed to prevail as the people who created the problems were “trusted” to resolve them!

Trillions have been “wasted” on sustaining a false market, supporting failed Financial and Political institutions whose flawed philosophies and (morally) corrupt culture were exposed long before the 2008 collapse. They have been allowed to, essentially, micro (mis)manage – nationally and regionally – issues that required an holistic perspective (across domains), clear decisive leadership and macro management. Read more of this post