Regulators should not focus on those risks (weather prognosis) bankers already consider, but on the uncertainties

Sir, several prominent names write: “Last week Andy Haldane… admitted that economists had failed to predict the financial crisis, and compared the situation with that of ill-informed weather forecasting in 1987 — the “Michael Fish moment”. And the experts argue: “At the heart of the crisis would appear to sit faulty accounts and unreliable audits” and as a consequence they request more reliable accounting rules. “Clearer picture of banks’ capital is required to help avert crises” January 12.

Sir, no one can argue against better accounting rules, but please, that is not what created the financial crisis.

In terms of weather forecasting what happened (and what is still happening) was that not only did the banks follow the credit forecasts to set their exposures and interest rates, but so did the regulators, when they set their risk weighted capital requirements. That meant that “weather forecasts” got to be excessively considered. The regulators role on the contrary was and is, not the management of perceived risks, but to consider the uncertainties, like weather prognosis being utterly wrong.

PS. De facto, absurdly, it meant regulators believed bankers were going to go out, especially, when the weatherman was announcing a storm. 

@PerKurowski

Bank regulators should never trust bank meteorology but prepare for when it fails

Sir, John Kay ends his “Spotting a banking crisis is not like predicating weather” August 16, mentioning “we are better at avoiding drizzle than financial crises”. I do not agree, the two events are not comparable.

First, if you listen to a report on bad weather, you might take shelter, but you cannot influence the weather. But, if for instance the IMF would suggest a probability of a crisis in the banking sector somewhere, it could help to make that crisis a certainty.

Then of course are the consequences. I am sure John Kay has found himself under a surprising drizzle many times, only that he does not remember it, because, unless it happens for instance during a wedding party on a lawn, it really does not mean so much. A banking crisis is, on the contrary, usually, unfortunately, a too memorable event.

Because it is relevant to the theme of banking and weather, and it further explains my arguments, I include below an extract from my opinion “The ‘Mistake’ that dares not speak its name”, which was published in The Journal of Regulation and Risk North Asia, Summer 2013.

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Mark Twain wrote that: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”.

And the weatherman could predict sunshine or rain, and he could be right or wrong.

If rain was announced and it rained, no problem for the banker, as he had either never lent the umbrella or had already taken it back. If rain was announced, but the sun shined, the banker may have lost some good tanning opportunities, but that’s about all. If sunshine was announced, and the sun shined, there are of course no problems for the banker.

But, if sunshine was announced, and it rained, then the bankers would be in serious trouble. And this could be why Mark Twain also said: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”.

PS. You can find the whole opinion here, and of the whole Journal here

Please, if we are to stand a chance, we must not allow the fight for less environmental damages to be politicized

Sir, with respect of the threat of climate change, or, ‘the just plain huge environmental damages of which we do not know what consequences these will have though we might presume these will not be overly positive’, I do not agree with Clive Cookson’s conclusion that “a second Obama administration seems certain to do more [reducing carbon dioxide emissions] than a President Mitt Romney”… that is unless he considers taking a baby aspirin is a solid way to fight a tumor, “It shouldn’t have taken Sandy for US to debate science”, November 3. 

In fact given that the environmental challenge needs the cooperation of everyone if we are going to stand a chance, including by the way that of the poorest of the poor, the worst thing we can do is to politicize it, or allow the solutions to become the exclusive domain of some self defined especially conscientious high income earning groups. 

That we need accurate forecasts no one doubts; that governments are the best fitted to provide these services is probably true, but, as citizens it behooves us to always and continuously explore alternatives, like what if all money publicly spent was used for premiums to the 100 most accurate and important weather prognosis provided to the public each year… with a charge to all service providers for the 1o most important weather prognosis mistakes. 

When Cookson writes that “Mismanagement and under-investment threaten the US weather satellite programme”, I am quite sure that neither he nor I, have the faintest idea of how much of the threat corresponds to each of the two factors he lists. 

On a more personal note, for many years now, I have expressed surprise over the fact that those who seem most concerned about the environment, and thereby as I see it should be the most concerned with how scarce resources are used to meet the challenge, seem the most willing to throw resources at it with no contemplation at all given to how do that more efficiently.