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{{a|devil|{{catbox|newsletter draft}}}}Newsletter cribnotes | {{a|devil|{{catbox|newsletter draft}}}}Newsletter cribnotes | ||
==Rokos short primer | ==Rokos short primer== | ||
... Punting on interest rates | ... Punting on interest rates | ||
==How do you find the time bombs in your balance sheet== | ==How do you find the time bombs in your balance sheet== | ||
The JC found to his surprise and delight that his big sister reads the newsletter — normally no-one in the Contrarian clan pays him the blindest bit of attention | The JC found to his surprise and delight that his big sister reads the newsletter — normally no-one in the Contrarian clan pays him the blindest bit of attention — and after his peroration about alternative tier one capital this week she had a question: does ''anyone'' understand the banking system? | ||
It’s a good question. The level of bank analyst Twitter shade-throwing — and central banker Twitter shade-throwing, for that matter — speaks to weak opinions strongly held. | |||
The question has particular | Is it — maybe, that no-one really knows? That it is this giant organic contraption that does what it will — for that is the whole of the law — and the those who rise to executive position do so by fiat and have as much understanding and control over these infernal machines as a chimpanzee strapped to a rocket? | ||
Did the quick succession of chief executives at Credit Suisse really have a clue what was buried in their balance sheet as the successive horrors revealed themselves? | |||
There is a chain of command question here. | |||
Clearly the chief risk officer cannot know the trade-level minutiae of every risk position in the book. For that she must rely upon an army of risk managers, hierarchically organised, to patrol their posts, sending reports to watch commanders, who in turn collate and send theirs to a regional coordinator, who will take the reports of several watch commanders and distil from that a highlights reel to go to the risk steering committee — and so on. That process hass somehow to deduce contextualise and aggregate those individual risk analyses, but at the same time deduce emergent risks from the interaction of those different situations, as well as wider trends and hotspots in the wider market. | |||
There has been a trend over decades now towards technology and process to bolster human analysis. In a tacit acknowledgement that perhaps it is too hard for mortal minds. The problem being that technology and process hasn't proved much good either. | |||
Part of the problem lies in the nature of catastrophic events. They have an unnerving habit of striking when and where you least expect it: where, QED, in places your telescopes and search beams are ''not'' pointed. The most successful firms on the street (LTCM, Enron) the chairman of the NASDAQ (Bernie Madoff). A sleepy benchmark interest rate-setting process managed by the dear old British Bankers’ Association (LIBOR). A Family Office running its own money and borrowing in a secured, margined basis (Archegos). Flighty bank depositors (SVB, Signature) | |||
They also have an unnerving habit of happening very quickly and uncontrollably. They have the characteristic of “normal accidents”, so named by Charles Perrow in his {{Br|Normal Accidents: Living with High-Risk Technologies}}: that is, a distributed system displaying a combination of non-linear, [[complex]] interactions and “[[tight coupling]]", where chain reactions are easy to set off and hard to stop. In systems of this kind, Perrow thought catastrophic accidents were not just likely but, from time to time, ''inevitable''. Such unpredictable failures are an intrinsic property of a complex, tightly coupled system, not merely a function of “operator error” that can be blamed on a negligent employee — although be assured, that is how management will be inclined to characterise it if given half a chance. | |||
History suggests risk managers aren’t very good at this. Our old friend Archegos | |||
Sidney Dekker’ {{fieldguide}} | |||
The question has particular urgency for the the executive suite at UBS. who has just taken on the assets and liabilities of Credit Suisse. While they appear on their face to have bagged the steal of the century, Credit Suisse is proven capability of sustaining and think of glee large losses in a short period must have giving them paws for thought. For who is to say that is not another 10 billion dollar loss buried somewhere in that balance sheet? | |||
Who, in other words, would be chief risk officer of a large financial institution. We know, in the case of silicon valley bank, that the answer to that question happened to be no one. | Who, in other words, would be chief risk officer of a large financial institution. We know, in the case of silicon valley bank, that the answer to that question happened to be no one. | ||