Monday, September 20, 2010
Process first ......and the numbers will follow
Case in Point Allied Irish Banks (AIB) in Ireland or further east, Hypo Group Alpe-Adria in Austria. After nationalization of both institutions amid bailouts of €25B and €3.75B respectively, the governments are trying to get to grips with:
1. Crappy loans
2. Crappy loans to the wrong sorts
The point? It really doesn't matter who or what the institution is, or what the numbers need to look like to pass regulatory scrutiny, the soundness of a banks business (or indeed any custodian, or fiduciary) depends ultimately on how it manages the processes around what it does and what the likely outcomes are.
Basel III as it now expected to be enacted is probably adequate for its numbers, but it can only ever be a part of the picture, not the whole. Markets have repeatedly defied the trust of government in an unregulated environment to act in a judicious and responsible manner. Why should we ever expect that markets should change their tune unless the incentive to do so exists. Valuing assets against "capital tiering" criteria is proven to be a broken model. Maybe its time for a far more systemic evaluation of business operational practices - in reality, Enterprise Risk Management applied in its widest possible context. After all, the risks we are most afraid of are systemic in nature.........