Donuts

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

My favorite is old-fashioned chocolate dipped cake donuts.  Unfortunately, and although I live in Canada – home of the most donut shops per capita – it is hard to find my favorite donut.  However this blog is not about the tempting afternoon coffee snack, but instead about the hole in the middle.

 

Most companies have professionals that are intuitively very good risk managers at the “ground level”.  These are front line operators and managers, who although they do not have risk manager in their title or their job description, intuitively and instinctively understand risk management as they go about their daily tasks and operations.

 

Most companies also have very competent risk managers.  These are the managers who do have risk manager in their title and risk management in their job description.  These are the people who design risk management systems and processes for the company.

 

Thus a company has great risk management at the ground level, and also has great risk management at the upper levels.  The problem is often is the hole in the middle.  The hole in the middle is the lack of a connection between front line workers who understand the tasks and associated risks at hand (but not the strategic risk issues), and risk managers who understand the strategic risk issues and the associated portfolio mathematics (but not the ground level day to day operational issues).  A company needs to ensure this hole in the middle is filled efficiently.

 

 

Meanwhile, writing this blog has made me want a donut.  Perhaps I will get a jelly filled donut if they are out of old-fashioned chocolate cake donuts.

Risks to Continued Austerity

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

French and Greek voters are rejecting austerity, forcing politicians to take the austerity debate seriously.  Voters are correct in that it is a bad idea to tighten fiscal policy when growth is so feeble as argued by Charles Wyplosz in recent VOXEU communique (14th May) The impossible hope to an end of austerity.  However, the road away from austerity is blocked by conventional policy views that debt reduction has the highest priority – often used to justify risk taking without considering potential implications.  

 

Evidence from Greece and elsewhere is that growth is disappointing and the debt-to-GDP decline is negative and deficits are “surprisingly resistant”.  The problem is that most policies take time to work, such as structural reforms that may take several years and do not provide prompt relief. 

 

It is a poor idea to tighten fiscal policy when growth is feeble or negative.  The results from budget consolidation are disappointing as the levels of gross public debt remain above earlier estimates and in some countries have increased.  European voters do not feel that the economic and personal costs have produced any significant results.  The case for fiscal consolidation remains weak when countercyclical action is required.  

 

Monetary policy has some importance as lower rates are needed, but with rates near zero any effect would be largely symbolic.  The results from quantitative easing have yet to prove its effectiveness as banks’ focus is on deleveraging.  The recent ECB liquidity facility seems largely used by banks to hoard cash rather than make new loans.  

 

Fiscal expansion remain a weak option as a number of countries have lost market access or on the verge of losing it.  Financial markets continue to clamor for growth and no austerity, but do not want to provide financing at attractive rates for growth.  Even if countries can borrow at attractive rates, can they serve as a locomotive role for growth?   

 

Wyplosz offers several ideas around the policy debate to provide some stimulus: 1) The European Investment Bank (EIB) could borrow and finance spending without adding to the members’ public debt burden; 2) The European Commission could speed up spending on infrastructure to produce some stimulus; 3) Eurobonds could be issued and collectively underwritten by member states; 4) The bonds could be made senior to existing bonds: and 5) The debt of some countries could be restructured.  The author concludes that all the policies combined would not be enough of a stimulus.  

 

The problem is holding governments to infeasible debt reductions for a couple of years that will take decades to resolve.  Otherwise, voters will continue the protest and the austerity debate will remain a “hot” political issue.  As in risk management, conventional wisdom does not always provide the best answer.   

 

For more on this follow the link: www.voxeu.org/index.php?q=node/7988

 

 

Victoria Day

by Rick Nason, PhD, CFA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

 

This past Monday was Victoria Day – a holiday in Canada, but ironically not a holiday in Britain.  Victoria Day of course celebrates Queen Victoria – a queen that no one currently living remembers, and a Queen who ruled over the Victorian era.

 

Victoria Day is a welcomed holiday in Canada.  It basically marks the first reliable weekend of decent weather and thus it is a weekend for the first tennis tournaments of the season, races, baseball tryouts etc.   In Canada we all like the Victoria Day Holiday.

 

However, there is one thing about Victoria Day that bothers Canadians and it comes up every year.  That issue is, “Why the heck do we celebrate this monarch who no one really remembers and what exactly did this monarch do for Canada that is worthy of celebrating?”  Now before the monarchists send me angry letters, I am highly confident that there are many legitimate reasons for this holiday, but the point is very few people know why we do.

 

It is a bit like many risk management systems and procedures.  There may (or may not) have been legitimate reasons for why they were put in place originally, but few people now know or understand why.  Other systems and procedures have been in place for so long that no one questions why they exist.  Perhaps it is a good time to ask some questions and see if things need to be freshened-up.

 

In the meantime, I am going to enjoy the beautiful weather we have on this holiday Monday.

Risks on new Bank Capital Standards

by Don Alexander, MBA

Associate, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Bankers, policymakers and regulators continue to debate on the content of new bank capital requirements rather than setting global standards.  In the view of recent losses by JP Morgan and recent research reports calling for more bank capital, the need for global harmonization of standards takes on a new sense of urgency.

 

Nicholas Veron, in a recent VOXEU communique of May 4^th, The European Debate on Bank Capital is Not Just About Europe looks at the European experience.  European officials are deciding on the legislation to implement Basel III agreement on bank capital, leverage, liquidity and risk management. 

 

Officials, however, have severely underestimated the importance for reaching a global standard for financial regulation.  There are two unresolved issues in Europe: (1) the legislation’s departure from Basel III provisions; and (2) whether member states would be allowed to impose their own core requirements in regards to bank capital ratios. 

 

The first issue exists for both Europe and globally since it is about the definition of bank capital and how it should be applied to subsidiaries.  EU institutions regard global harmonization as overriding good, superseding misgivings about individual provisions or national authority.  Although, EU banking regulations are done at the national level and are not standardized creating a problem to see what is “liked” or “disliked”.  This makes the regulations vulnerable to special-interest groups. 

 

The crisis has changed the dynamics between the EU and global standards.  Institutions are now focused more on content than global harmonization.  This is complicated by a lack of a consistent approach by EU policymakers and the U.S. SEC’s delay in endorsing the proposed implementation schedule for global financial reform.  An American proposal that is compliant with Basel III would encourage EU and other doubters to comply. 

 

Global harmonization would help minimize competitive distortions inside the EU.  The main problem specific to the EU is that banking services remain under national authorities.  This results in a lack of a unified approach to bank supervision/resolution and pegs banks financial health to national authorities.  A more timely U.S. response combined with a unified EU approach could help reduce risk.

 

Although, Basel III requirements do not resolve all financial regulatory issues, a global harmonization of regulatory standards would be far better than our current fragmented system.  Perhaps the losses by JP Morgan Chase might force regulators to focus on implementation of a global standard.  The alternative of a fragmented regulatory environment could be costly.

 

For more on this simply follow the link: http://www.voxeu.org/index.php?q=node/7948