The counterspell for the Sorcerer’s Apprentice

Avec le soutien de

1. What do you think when you hear about the SBM case?

It’s a banking sector-wide issue, not an idiosyncratic one.

Einstein - two things that are certain: death and taxes. A third one could be: banks’ loans go sour. Not all of them, thankfully, but some will fail. It’s a matter of “when” not “if”.

Dukas’ Sorcerer’s apprentice, based on a Goethe’s poem, or for a younger audience Disney’s Fantasia.

Fast forward to 2008, the global financial crisis and the demise of two major UK banks. This has a personal undertone. I led the balance sheet risk management for the subsequent £ 17 billion recapitalisation of Lloyds bank.

Finally, “ungoverned incompetence” 2 . The root cause of such failures is often, “someone doing the wrong thing while trying to do the right thing, and organizational systems, checks and balances failing to catch it and contain it”. Searching for malfeasance and fraud, in the hope of absolving the Board for its own shortcomings in risk understanding, awareness, preparedness and governance; is in my opinion ineffective.

2. Risk: Known unknowns and Unknown unknowns

The “Swiss Cheese Model”, used to investigate aviation accident causation is strikingly relevant and applicable to banking. There are four “layers”:

i. Organisational influences,

ii. Unsafe supervision,

iii. Preconditions for unsafe acts,

iv. Unsafe acts.

Unsafe acts can never be totally prevented. Good governance controls the first three layers. Consequently it defines the risk of malfeasance by design or default. In my experience, the Achilles’ heel is the permeability of the first three layers. Hence, it is a governance issue.

Deal makers often refer to the risk function as the “business prevention unit”. A risk culture is indispensable. It is about genuine zeal, capabilities, framework and infrastructure. Identify, quantify, monitor, control, report and actively manage risk as per the official risk policies and mandates. These are ratified by the Board and relevant governance forum. They are revised to stay relevant and fit for purpose. They are refreshed to learn from mistakes and mishaps.

Governance forum and board dynamics have their own idiosyncratic biases. Senior management are skilful at gaming them . Governance is about going after the “known and Unknown unknowns”. It is not a tick-box exercise about process and should be embedded in the organisational risk culture and DNA.

3. Trust and populism: Technology disruption in financial services

Over the past three decades, my involvement in the global financial markets ecosystem has been punctuated by disruptive transformations: deregulation in the 80’s, regulation in the 90’s and lately FinTech and RegTech.

Banks are tweaking their antiquated business model to offer a competitive customer experience and price in areas as diverse as payments, lending and investment. However, digital-age thinking is a new paradigm be it for profitability, risk or governance.

In some of my latest risk engagements in the cryptocurrencies space, it dawned on me, the core business of banks and, more importantly, that of central banks too, are being encroached. Cryptos are not just a new asset class - with the traditional characteristics of medium of exchange and store of value. They are “mined” outside of the traditional banking system. The block chain technology is doing to finance what populism is doing to politics. At the heart, is the issue of trust. That’s the product of a leadership failure. Leaders have reneged the core values and have instead instilled a mercantilist culture.

4. “Expelliarmus” 6

If one can’t get right a simple product such as a loan, what are the odds of excelling in market activities, wealth and asset management or crypto-currencies? Incompetence is not a criminal offence. “Ungovernance” is a dereliction to deontological duties, which is increasingly a criminal offence.

So what is the counterspell?

Risk is a scarce commodity. Risk awareness and preparedness are “must-have” features. The Board must “keep its fingers out but its nose in”, preferably “deep in and everywhere”like a bloodhound. Anything less is negligence.

There lies the “Expelliarmus” to “ungoverned incompetence”.

No need for Ollivanders in South side Diagon Alley, no magic

wand required.

1. Risk and Governance subject matter expert with experience in financial litigations and regulatory investigations. Jaya also participated in a yearlong study at Balliol College Oxford, which culminated in the publication of “Capital failure, Rebuilding trust in financial services” (Morris & Vines, OUP 2014).

2. Harvard Business Review P Cebon, Jan, 2017.

3. Reference used by Donald Rumsfeld during desert storm.

4. Gaming of the credit committee in the case of the Corporate division at Bank of Scotland as revealed in the FCA investigations.

5. Goldman Sachs with the CDO structuring or Royal Bank of Scotland with its Restructuring unit are good illustrations.

6. Harry Potter’s favourite spell.

Rejoignez la conversation en laissant un commentaire ci-dessous.

Ailleurs sur

Les plus...

  • Lus
  • Commentés
  pages consultées aujourd'hui Statistiques et options publicitaires