August 14, 2013

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.

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