The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘BofE

BofE Governor in the dark on banking regulation

The management of UK banking/ financial system has become highly politicised reflecting the general Browns government style. This from the meeting yesterday between Mervyn King, Governor of the Bank of England and the Commons committee.

Governor in dark on banking regulation | FT

His comments to MPs on the Commons Treasury committee flabbergasted its members. John McFall, the committee chairman, said the lack of communication at the top level between the Bank, Treasury and Financial Services Authority was unbelievable. “The tripartite authorities are a communications black holes, which is worrying.”

Written by Colin Henderson

June 25, 2009 at 10:20

Posted in UK

Tagged with ,

New thinking for Risk Management | Deloitte

Risk management has come under the microscope of late, and clearly new thinking is required.  Recently Andrew Haldane of the Bank of England reflected to the weeks and months that it took to work “stress test” models within banks and how that is clearly unacceptable.  He described stress testing as being less “regulatory arbitrage” and more “regulatory camouflage”. (my post summarising Haldane)  (Haldane – BofE pdf)

The Deloitte Center for Banking Solutions has a new report out that focusses on providing for an integrated approach across the enterprise.

Integrated Compliance and Risk Management Rethinking the approach

Unprecedented market turmoil in the industry has compelled financial institutions to rethink their existing compliance and risk management programs, many of which have failed to keep pace with evolving levels of risk. As a result, financial institutions are taking a critical look at how they manage compliance and risk to gain a better understanding of how their institution is impacted by the dynamic risk environment of a global financial community.

I think this is a great start.  The thinking will need to then focus on the methodology that will accommodate the other factors that Haldane spoke of, ie, disaster myopia, network externalities, and misaligned incentives.  These are important because current risk models do not adequately address those factors for most organisations.  This gets into the methodology that will have greater chance for success and that will operate at the speed and alacrity that the real-time world requires.

Written by Colin Henderson

February 25, 2009 at 14:40

Disaster Myopia and other causes of banks’ problems

Andrew Haldane, Executive Director for Financial Stability, Bank of England diagnoses the failure of bank stress tesing in this speech given at the Marcus-Evans Conference on Stress-Testing.   He speaks of the Oct 87 crash, the LCTM hedge fund 98 failure as well as the 2007/8 crash.

Why Banks Failed the Stress Test:  Bank of England pdf

He sees three categories of failure:

Disaster Myopia

Essentially this is positive thinking that increases the longer since the last disaster.  He only somewhat jokingly wonders whether “10 years is the threshold heuristic for risk managers.”

Network externalities

He speaks of the financial system as a network of connected parties.  “When assessing nodal risk, it is not enough to know your counterpart;  you need to know your counterparty’s counterparty.”

Misaligned incentives

“Financial innovation lengthened the informational chain from ultimate borrower to end-investor.  The resulting game of Chinese whispers meant that, by the time information had reached the investors at the end of the chain, it was seriously impaired”


“There was absolutely no incentive for individuals or teams to run sever stress tests and show those to management”.

He draws on the recent experience at HBOS whereby the whistleblower who dared suggest the bank was growing too fast was summarily fired by Sir James Crosby.  Sir James went on to become deputy head of the FSA and advisor to Gordon Brown till he was forced to resign last week.

Based on work at the FSA and is own assessments, he puts forward a five point plan:

  1. Set a stress scenario that is sufficiently extreme
  2. Regularly evaluate the scenarios
  3. Keep the process dynamic and iterative
  4. Translate the results into impact on bank liquidity and capital planning
  5. Employ transparency with the regulators and the financial markets

Finally, the charts contained in the appendix are illuminating showing one view that indicates the ‘golden decade’ of 1998 – 2007 was sufficiently out of sync with the period 1857 – 2007 to indicate imminent disaster.  While this is armchair economist thinking, it is sobering to realise that this is based on the same data that was available to us all during the last 10 years.  The first problem of ‘disaster myopia’ is very real.

Written by Colin Henderson

February 16, 2009 at 15:47

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