by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
If you were the Risk God, what would be in your Garden of Eden? What would be your ideal construction? Would your universe be without risk? Would it be without uncertainty? That would be dull, would it not? It would also be ruinous for all of us employed as risk professionals.
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
With the title I suspect you thought I was going to blog today about the risks of having people within (and external to) your organization tweet about the organization. I’m not – but probably will at some time in the future.
What I thought I would spout off on today is how Twitter is slowly changing our language patterns. Expressing your thoughts in 140 characters or less is definitely having an effect on spelling and grammar. However I believe the bigger effect is on how we think in terms of small, single, thought bits, rather than in more complex and nuanced ways.
I am obviously not the only one who thinks this. For instance, the fact that there is a service called Longreads (www.Longreads.com) shows that others are realizing that our media (and our thoughts) are becoming more sound bites than biting. (BTW – I highly recommend LongReads. Great articles.)
Now back to my point about Twitter. Encapsulating your thoughts in 140 characters or less is not all bad. For one thing it forces you to be sharp and to the point. It also forces you to cut out the unnecessary. Struck and White would probably be big fans. Here is the question – could you publish your risk results using Twitter? Should you?
by Don Alexander, MBA
Associate, RSD Solutions Inc.
As the European debt soap opera continues, Europe’s leaders have expressed their willingness to “do whatever it takes” to restore financial stability and save the euro. This is very similar to the Virginia dance that moves two steps forward and then one step back. Morris Goldstein, Stop Coddling Europe’s Banks (VOXEU, Jan. 11th), argues that policymakers’ actions too often serve the banks at the public’s expense.
Policymakers now acknowledge the wisdom of comments by IMF Head Christine Legarde at Jackson Hole (2011) about the need to recapitalize European banks. Goldstein indicates five concerns to address: incentives for deleveraging, guidelines for dividends and compensation, alternative macro scenarios for stress tests, burden sharing during restructuring and measures to address feedback loop on sovereign and bank debt.
The European Banking Authority (EBA), however, specifies a bank capitalization target (but not one made mandatory by national authorities) as a ratio to risk-weighted assets rather than converting that ratio into a target for bank capital alone. Banks may sell assets and tighten credit when new lending is needed.
The EBA advises banks to tap private-sector sources for recapitalization, but does not provide guidelines for either dividends or compensation. This is no directive for banks falling below the capital target on the payment of dividends or executive compensation.
The bank stress test scenario focused on mark-to-market losses on sovereign bonds and did not consider alternative macroeconomic scenarios (including much weaker euro area private forecasts). Bank capital positions were assessed only against a risk-weighted standard and not against an unweighted leverage target.
European Council, at the December Summit, decided to reverse its earlier position of private sector involvement; it announced that private-sector burden sharing would no-longer be required beyond the restructuring of Greek sovereign debt. This implies that the taxpayer will have to absorb any losses while the private-sector is the beneficiary of any upside potential.
Lastly, there is the problem of the adverse feedback loop between sovereign debt and bank debt. There are a number of long-term solutions, including a tougher fiscal compact, a bank capital target or a permanent financing facility. One short-term solution might involve the issuance of bonds with a risk-sharing mechanism.
While not mentioned in the paper, the slow plodding by EU policymakers, has not resolved the agency problem for European banks still subject to national regulation. As a result, these banks come under political pressure in their home countries to take additional sovereign bond exposure after any poor auctions. This has pushed a sovereign debt crisis into a banking crisis raising the risk of contagion and the cost of resolution. The temporary ECB liquidity facility provides a temporary solution and kicks the can further down the road.
If one examines the stance the official sector has taken toward banks, it looks like Euro zone leadership allows large banks to do what they please, even when they act in their own narrow interest rather than in the wider public one. It is not an optimal risk management paradigm of two-steps forward and one step back. It is time for a change.
For more information on this please follow the link: www.voxeu.org/index.php?q=node/7511
by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I am stuck in an airport with a seven hour delay as my original connecting flight home was cancelled. The exciting life of the business traveller!
To help pass the time I started to read the book “No Regrets”, by Ace Frehley, the original guitarist from the 70’s rock group KISS. It is probably not going to be the best biography of the year, but I have to admit it does help to pass the time. It also is not going to be the business book of the year, but strangely enough (and perhaps because I am late getting my blogs together for the week) I started to see a lot of business lessons coming out of the book. (Long layovers and business travel can do strange things to you – and yes I am staying away from the open bar in the airline lounge!)
One of the interesting points that Paul (Ace) Frehley brings out in his biography is the distinction between session players (musicians who earn their living by being musicians solely for the purpose of recording) and live performers. Clearly session musicians are the better musicians, but they are rarely household names. Session musicians don’t make mistakes. They are hired because they are precise, professional and can play the same piece of music exactly the same way as often as is required for a suitable track to be made. Session performers can also read music proficiently.
Live performers by contrast are generally not as good musically. Many of them (including Ace) cannot read music. Getting a reliable sound that is mistake free from a live performer is an almost impossible task. Yet live performers (such as Ace) who become successful are extremely well known and phenomenally successful economically.
In risk management are you a session performer or a live performer? Does your risk management team perform live or only in session? Which type of risk performer do you want to be?
