September 05, 2015

We must make sure our bank regulators possess sufficient mental bandwidth to perform their duties

Sir, Tim Harford writes that a study in 2006 led by David Strayer, a psychologist at the University of Utah, found that: “The problem with talking while driving is not a shortage of hand. It is a shortage of mental bandwidth” “Multi-tasking: a survival guide” September 6.

What an interesting piece of information. Now we only have to find a reliable way to measure mental bandwidth, so as to be able to make sure vital decision makers have sufficient of it.

Clearly that was not the case of bank regulators. As a minimum these should have sufficient mental bandwidth so as to be able to simultaneously regulate against the risks of the banking system collapsing, and make sure that banks adequately achieved their purpose, like that of allocating credit efficiently to the real economy.

As is their mental bandwidth was so scarce they could (and can) only handle the risks of individual banks failing. As a result our whole economy is failing here and there.

Had they had enough of it they would have understood that the speedier an individual bank that cannot perceive adequately risks or manage these fails, the safer the whole system.

Had they had enough of it they would have understood that the last thing they should do in order impose capital requirements as a shield against unexpected losses, was to base these on about the only risk that was already being sufficiently cleared for, namely credit risk. 

Had they had enough mental bandwidth they could have set their capital requirements based on a thousand more appropriate risky events, like cyber attacks, China’s economy imploding, an asteroid hitting the earth, or central bankers not having a clear idea of what they are doing.