To rise to the level of incompetence, “The Peter Principle”, has clearly been applicable in the case of current bank regulators

Sir, Sir Cary Cooper of Alliance Manchester Business School, when commenting on Tim Harford’s Undercover Economist column “We should not let bad managers stick around” (July 21), and the Peter Principle writes: “When promoting staff, many place disproportionate importance on a good run of form/current performance over their talent and skills to do the job they’re being promoted to. A good backbench politician won’t necessarily make a successful minister.” “Don’t allow ambition to cloud our talent judgment” August 4.

Indeed, and that is exactly what has happened to our bank regulators. One thing is to be a banker and carefully analyze the risk for the bank, and another, completely different, is to be a regulator having to analyze the risks of the bankers not being able to correctly analyze or respond to risks.

In this respect all current regulators, who could have been doing reasonably well analyzing individual small banks, when they still keep on thinking that what is perceived as risky is more dangerous to the bank system than what is perceived as safe, they have clearly risen to their level of incompetence.

PS. By the way, talking about business schools, why have they all kept mum on this? Could it be that all there wanted to be bankers and enjoy the big bonuses that could be paid when there is so little equity that needs to be remunerated? Or is it that they just don’t want to be seen as bankers’ party-poopers.

@PerKurowski

The Peter Principle needs an addendum

Sir John Kay writes “Banks brought down by a new Peter Principle” August 26, and scores good argumentative points. That said the banks and the financial sector have also been severely affected by the Peter Principle that operated in the financial regulatory world.

In this case the Peter Principle could have been activated when allowing PhDs to move from financial modelling directly into the financial application of models, without having to dirty their hands with for example some old fashioned inventory finance. But, if so, this also calls for an addendum to the Peter Principle since that would indicate that it is not only about individuals moving up until they find their level of incompetence, but also about competent individuals moving into areas where their competence is outright dangerous.

Who but a deskbound PhD could have come up with such a crazy notion that you could outsource so much regulatory powers to the credit rating agencies without these being subjected to capture… ipso facto.

A prudent regulatory reform might be to see to that the PhDs are always in minority wherever decisions affecting life on main-street are taken.